…the price of a barrel of crude has been falling: from a peak of $145 in early July, it came down to $117 and was trading yesterday at $120. That’s almost a 20 per cent drop in little more than three weeks.
If the trend continues into September at anything like the same rate of descent, most of the inflationary spike of the past 12 months will miraculously have been sliced away. This is a dramatic reversal, and it is worth trying to work out why it is happening and what it means.
Just possibly, it means that what investors refer to in shorthand as the great “oil up” story has finally revealed itself not as the fundamental reflection of scarce supply that its adherents liked to claim, but as a simple, speculative bubble that was always going to burst.
Question? If the price of oil is going down so quickly, then why are our pump prices not doing the same? In Fresno, Ca gas is still at $4-$4.10 a gallon. It was at $4.50 and that was 3 weeks ago. So while the barrel price is dropping quickly it appears that the pump price is not! Why?
I am not convinced that this is a bursting bubble. The worldwide supply of oil has not increased and the world’s appetite for it has also not decreased (at least significantly). We have a finite supply of oil and its getting harder to find and tap new sources. Add to this winter is fast approaching and the Middle East remains highly unstable. Venezuela is looking more and more like a Marxist dictatorship in the making and they have several times threatened to use their oil reserves as an economic cudgel.
All in all I am not sanguine about the price of oil. I think it went up a little too fast and what we are seeing is a normal correction not a burst bubble. Long term oil is going to continue to go up until the major world economies move to other sources of energy.
ICXC NIKA
[url=http://ad-orientem.blogspot.com/]John[/url]
My thoughts:
1) artificially inflated prices due to the Futures Speculators. Correction: Congress threatening action against the speculation industry.
2) view of supply being lower than demand. Correction: President Bush and the Republicans in Congress demanding more domestic drilling.
3) lack of alternative sources. Correction: T. Boone Pickens calling for more wind, solar, and natural gas.
There are probably more, but these are the three that I see as having the main cause/effect on prices.
As to the prices not going down as fast: The oil companies are still having to pay for the oil they bought at the higher prices. I’d like to see them go down further, but, hey, it IS a business.
Peace
Jim Elliott
Jim, I think you’re right on the money! There will be lower prices, I believe, and rightly so. It was said three/four years ago that $28 a barrel would be great and stay steady. That’s by the people who produce the stuff. At $45 a barrel, WOW! At $145 – “Don’t look at us; we just get it, we don’t set the price.” Now that the boom has boomed, a price between $60 – $90 would sustain the costs that are driven up in production. Back to $45 and big time problems for those in the oil fields. But as one oil man told me, “Sell what you have every day. Don’t wait for the price to be set.” This guy also knew it when prices were below $10 a barrel. Not that long ago, really, in the history of these things.
Edit: “T. Boone Pickens calling for more wind, solar, and natural gas.” and nuclear power, AND offshore drilling!
He corrected someone else who limited him to “wind,solar, and natural gas”, with
“I’m for everything”, the point is energy independence”..
Gloria in SC
[blockquote]If the price of oil is going down so quickly, then why are our pump prices not doing the same?[/blockquote]
Gas peaked a few weeks ago in St. Louis right at $4.00/gal. I paid $3.45 today and my daughter in Springfield, MO is paying about 20 cents less than that.
[blockquote]If the price of oil is going down so quickly, then why are our pump prices not doing the same?[/blockquote]
Because the market has already demonstrated that consumers are willing to pay the higher prices. The only thing that will work the prices back down is competition, and that will take more time than it took inventory replacement to work the prices up.
I would not get too excited about the current drop in oil/gasoline prices. If you look at the average price of gasoline trends over the last four years or so, there is a rapid run up in gas prices during the summer followed by a smaller drop-off in the fall. This is particularly pronounced beginning with 2005, the year Hurricane Katrina hit the Gulf of Mexico. Unfortunately, the Fall drop-off is smaller than the Spring increase giving us an overall 21% per year increase in the price of gasoline since the Fall of 2004 (after the price had stabilized from the 2004 summer peak). Put it another way; The current price in Mid-August 2008 is more than double (116%) the average price of gas in Mid August, 2004. By this simple regression analysis we, in Georgia, will be paying nearly $8.00 per gallon by mid August, 2012 and $4.50 per gallon in just 12 months and we will have seen prices as high as $5 – $6 during the July 4 weekend next year.
We have a real supply and demand problem that 20+ % annual increases in gasoline prices should point alarmingly to, and we should not allow ourselves to get energy policy side-tracked by bogus arguments saying that everything is fine … it is nothing but a speculation bubble.
If interested in the charts, go to: http://www.georgiagasprices.com/retail_price_chart.aspx
… and we’ll see on Monday when the markets react to Russia’s attempts this weekend to bomb a pipeline in Georgia.
Brian
I second Brian’s thought regarding the impact of the attack on the pipe line passing through Georgia.
Staking the future of even part of the world’s oil supply on oil coming out of Central Asia is a fool’s dream. The oil may be there, but so are some of the mosty risky political-military situations in the world. These are situations in which Russia, China, Turkey, Iran, Afghanistan, Pakistan and India have much greater access and strength than the United States or Europe.
Please remember that Russia is already using Western Europe’s dependence on Russian natural gas to ‘tweak’ and sometimes threaten to ‘arm twist’ European politics.
Brian of Maryland is right. Just last week prices went back up (and the Dow went down) when a Kurdish group attacked an oil pipeline in Turkey! And we don’t even buy oil from Turkey.
Every little blip and the markets go crazy.
Brian & Co are correct. This latest mess in Georgia will be the next excuse we consumers will hear about why pump prices (and the oil companies’ profits) are rising. The major tax breaks those companies receive should be withdrawn, immediately. They simply aren’t needed, and come from the hides of the working stiffs in our country.
The tax credits that are being withdrawn are those for biomass, wind and solar energy by the end of the year despite repeated appeals and testimony that such withdrawal is severely hurting America’s ability to compete for supply of and the construction for renewable energy.
If you ask me, everyone in Congress running for re-election needs to be fired by the voters for not ensuring the future of an energy independent USA.
“If you ask me, everyone in Congress running for re-election needs to be fired by the voters for not ensuring the future of an energy independent USA.”
Congress had better get serious or they will be seriously replaced.
By whom? No one running is any better or different from those currently “serving”.
In the private sector we would fire first and then replace. If the replacements fails we would fire them until they did what was asked of them. I do not think something as simple as an energy policy that Paris Hilton can articulate should be too difficult for this Congress to put into action, but they have been unable to do so, thus, it is time to say adios. Unless they know that they will be held accountable we will continue to get duds.