Low oil and gasoline prices have been a boon for American families and businesses, but the news hasn't been good for everyone. Businesses that benefit from high oil prices have been crushed and innovation in the energy space may come to a standstill. Here are three downsides of low oil and gasoline prices that you may not have thought of.
A few years ago, it seemed like a no-brainer that natural gas fuel would become a major provider of energy for vehicles large and small. Big, long-haul semi trucks seemed like the fuel's ideal market because of the potential savings natural gas provided over diesel, and building out infrastructure isn't as hard as it would be for passenger vehicles. That was the thought, anyway.
Clean Energy Fuels (NASDAQ:CLNE) and Westport Innovations (NASDAQ:WPRT) led the charge into natural gas fuels. Clean Energy Fuels built the Natural Gas Highway, a network of fueling stations around the country that would allow long-haul trucks to run on the fuel. Westport made the technology and components needed to run engines on natural gas. But their fortunes have turned south along with the price of oil.
Low oil prices and the subsequently low cost of diesel and gasoline have blown up the investment thesis both for investors in natural gas fuel companies as well as for fleets considering making the switch to natural gas. Why go through the hassle of switching to natural gas given less infrastructure and the capital cost of switching engines when diesel is cost-competitive today?
What's unfortunate is that this was an industry that once had a lot of promise for both cutting costs and reducing emissions from commercial fleets. Natural gas is cleaner-burning than diesel, and there's an abundant supply in the U.S. at fairly low costs. But low oil prices seems to have killed the natural gas fuel revolution before it ever really got started.
One downside of cheap gas that many people may not consider is the fact that Americans are more likely to drive more on roads that can't handle it.
For example, according to a recent survey by the National Association of Convenience Stores, 34% of motorists plan to drive more in August this year than last year thanks to gas prices falling nearly $1 per gallon compared to August 2014.
The reason that might be a bad thing is that U.S. highway maintenance depends largely on the federal gas tax-funded Highway Trust Fund, which is in rough shape.
In fact, over the next decade, the fund -- which doles out money to states to fix their roads -- is expected to face a $168 billion shortfall. The reason for the deficit is twofold.
First, the federal gas tax was last raised in 1993, and in the intervening 22 years inflation has decreased the buying power of those funds significantly. In addition, rising fuel economy over the decades has decreased the amount of gas U.S. drivers are using.
By law, the Highway Trust Fund cannot borrow money and must rely on its reserve fund to cover times when expenditures exceed revenue, which has become a permanent state of affairs since 2008. Had it not been for Congress transferring emergency cash out of the General Fund -- a risky long-term solution given the vagaries of congressional budgets -- to the tune of $60 billion between 2008 and 2014, the Highway Trust Fund would have completely run out of money.
Permanent solutions to the problem have been proposed, such as a $0.15-per-gallon increase in the gas tax that would be pegged to inflation. However, current congressional gridlock makes such legislation unlikely to pass.
Low prices at the pump are great for U.S. consumers, but they can have huge financial implications for the countries that rely on oil revenue as major components of their overall economy. The oil-rich areas of the Middle East are the obvious losers from low oil prices, but the Russian economy also remains highly dependent on its energy resources to produce hard-currency revenue that bolsters its public finances.
Countries in developing parts of the world are at even greater risk from oil's drop. Closer to home, Venezuela has long relied on its oil revenue to support its socialist government, and falling oil prices have made partners like China more reluctant to extend credit at a time when repeated devaluations have already roiled the local economy. In Africa, key producers like Nigeria have used high oil prices in part to help support development efforts in other areas, and the threat of those funds drying up has led to continued unrest throughout many parts of sub-Saharan Africa.
The need for the U.S. to address the political implications of low oil prices eats into the savings that consumers enjoy because of falling prices at the pump. Combined with the impact on the domestic energy industry, some have argued that lower gas prices actually aren't a positive thing on the whole.