Energy Views

It now appears that world oil traders have finally realized that the world is not short of oil, at least for the short term . The price of crude has declined steadily for the past 40 days, declining a total of over $15 from $78 plus in early August to around $62.50 today. So how much lower will crude go? Of course no one knows, but Economics 101 teaches students that when supply exceeds demand, the price will go down. And that is where we are today.

It is clear that recent high crude prices did reduce demand somewhat. This has been hard for traders to understand — demand for crude oil is not fixed, and it will fluctuate with the price of crude oil. However, listening to news media interviews today, drivers already are thinking about driving more now that gas prices have declined. So as consumption picks up, this will put the brakes on the crude price decline, and we may even see a slight rise. My guess is we will see more crude price decline for 1 to 2 months before it bottoms out. I expect it to get into the high $50’s at the bottom.

OPEC members have indicated they intend to take action (curtail shipments) and attempt to hold the price above $60 per bbl. I am skeptical that OPEC can have any great effect on crude prices. OPEC production is now less than 30% of world production, and some OPEC members have let their production decline in the past few years. However, certain OPEC members can “scare” the price up with their saber rattling and threats. Higher oil prices are so important to them, that I think we can anticipate that some threats will occur, and it may be enough to raise the price a few dollars per bbl.

So hang on for the ride, but make plans to be prepared for the next rise in crude oil prices, probably starting in late 2006 or early 2007. And make no mistake about it: long term, crude oil prices will rise. Again, Economics 101: we are faced with rising demand, and reduced supplies.

OPEC meetings have become non-events. This is because they no longer have a huge surplus of oil available. (In fact, Venezuela and Iran have seen significant declines in their production.) OPEC member’s need for cash no longer gives them the ability to withhold oil from the market. So the most we can expect is some discussions about maintaining prices as high as possible for crude oil.

MarketWatch quoted me again in this story about the topic:

Oil’s volatility has made OPEC unusually silent