So What's The Deal With Fuel? (Part 1)

• Why has the price of oil dropped so fast? Why now?
• Is there a conspiracy to bring the price of oil down?
• Will global oil prices stay low?

They say a little knowledge is a dangerous thing, but it's not one half so bad as a lot of ignorance. So, if you are involved in a business that spends a lot of money on fuel, it makes sense to know where the supply comes from, who prices it, and how that translates into what you pay at the pump.

With a basic understanding of the oil and gas business in general, businesses can better understand the fundamentals of fuel pricing, current trends and future risks. Knowledge is value, so read on.

Why has the price of oil dropped so fast? Why now?

It boils down to the simple economics of supply and demand.

United States domestic production has nearly doubled over the last six years, pushing out oil imports that need to find another home. Saudi, Nigerian and Algerian oil that once was sold in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices. Canadian and Iraqi oil production and exports are rising year after year. Even the Russians, with all their economic problems, manage to keep producing. On the demand side, the economies of Europe and developing countries are weakening and vehicles are becoming more energy-efficient. So demand for fuel is lagging a bit.

Is there a conspiracy to bring the price of oil down?

There are a number of conspiracy theories floating around. The Saudis want to hurt Russia and Iran, and so does the United States – motivation enough for the two oil-producing nations to force down prices. Dropping oil prices in the 1980s did help bring down the Soviet Union, after all. But there is no evidence to support the conspiracy theories, and the United States is hardly in a position to coordinate the drilling of hundreds of oil companies seeking profits and answering to their shareholders.

Will global oil prices stay low?

This is very hard to predict. If oil demand remains weak and production stays high, prices might not bounce back for some time. Most experts agree that $70 a barrel by the end of the year is doubtful and many think it will be years before oil returns to $90 or $100 a barrel, pretty much the norm over the last decade.

But the world is full of potential surprises. Conflict could break out again in Libya or Iraq, which would restrict oil production. China's and Europe's economies could recover and Saudi Arabia may decide that enough is enough and suddenly cut back on production. Any of those things could increase prices.

If history is any indication, oil prices will eventually rise again, and some experts think we should be preparing for that day. Our advice to customers is not to get too comfortable with low pump prices. It won't last forever, so continue to think about how you reduce fuel burn because it is good for the environment, it's good for business and if you go back to old habits and suddenly diesel is back at £1.50 litre, you are going to not be real happy

To find out how vehicle telematics can help you control the fuel costs of your business click here.