Oil prices continue to plummet due to record production and weak demand.
Production increases in North America are attributable to the various shale plays and the ever increasing technological advances in horizontal drilling and completion techniques. In addition, the middle-eastern OPEC countries have increased production in an attempt to stymie this new American industry.
Factors affecting weakened demand include the historically mild winter in the United States, more fuel-efficient automobiles, and declining economic expansion in China.
All of this has led to record low crude prices. Below is a ten-year Brent Crude Oil (ICE) historical price chart, indicating a price per barrel of approximately $35 as of January 6, 20161. As you can see, it is the lowest price during the ten-year period.
Ten-Year Brent Crude Oil (ICE) Price Chart
As a result, consumers are enjoying relatively low gas prices, even when the effects of inflation are considered. The real price of gas adjusted for inflation is projected to be $2.34 for 2016, which is the lowest since 2004, when the real price was also $2.342.
Unfortunately, not everything is positive for consumers when it comes to lower oil prices.
The standard mileage rate is computed to include the fixed and variable costs of managing a vehicle. There is a significant correlation between oil prices and the standard mileage rate, as depicted in the graph below.
Oil Prices and the Standard Mileage Rate By Year
As illustrated above, when the price of oil goes down, the standard mileage rate typically follows. This means taxpayers realize a lower tax deduction for the business use of an automobile if the standard mileage rate method is chosen. Also, if your company has a business travel reimbursement program tied to the standard mileage rate, less reimbursement will be paid to you for the personal use of your automobile.
Similarly, the annual Social Security COLA (Cost-of-Living Adjustment) closely tracks with the price of oil. The only three years in the last ten where the Social Security COLA increase had a 0% increase from the prior year were 2009, 2010 and 2015. This so happens to correlate with significant drops in the price of crude oil during those same time periods. A ten-year history of the Social Security COLA adjustment is below:
Ten-Year Social Security Cost-of-Living Adjustment (COLA)
Chances are good when Social Security is your only source of income that you’re not taking too many road trips, but if you want to, you are going to be able to drive a little further!
2 Price in 2015 dollars www.eia.gov