For a long time, as the price of oil climbed, many analysts claimed that the fundamentals were out of whack. Indeed, demand for oil was increasing, particularly in China; indeed, it appeared that global oil production may “peak,” and may already have done so, which meant global supply may simply be incapable of keeping up with demand.
But these factors notwithstanding, the rise of oil was simply too steep, too spectacular; there were no real supply issues, and the most minor of incidents (the frequent pipeline attacks in Nigeria, for example) were used, during oil’s run-up, to justify advances of leaps and bounds. And much of this, we now see from oil’s precipitious drop, was speculation.
The opposite seems to be happening now. Oil, today, is down around $104 per barrel - this, even though there’s talk of OPEC actually cutting production. Hurricane Ike approaches, and oil goes up slightly - but then resumes its drop.
The most oft-cited reason for the drop is oil prices is the drop in demand caused by high prices. But the reality is that as prices go back down, demand will go back up. Your Ford Expedition becomes a lot more affordable to drive at $3 per gallon than it is at $4 per gallon; and because of this, you are likely to use it more often.
In other words, the fundamentals haven’t changed. Goldman Sachs confirmed this yesterday, leaving its fourth-quarter price forecast at $130 a barrel; and forecasting $140 for 2009.
Unless - and it’s a big unless - the globe falls into recession, in which case oil prices could be back down to double-digits.
Just as a variety of factors sparked an unreasonably bullish attitude towards oil earlier this year, so it seems the dampening of demand sparked an unreasonably bearish attitude. As prices fall high gas mileage becomes less of a necessity; those who have switched to public transportation (or bikes!) switch back. T. Boone Pickens’ plan seems to be less of a necessity. Crisis over; and we just need to get back to the way it was - the state of affairs that triggered the price spike in the first place.
