The oil price puzzle

With crude oil prices $30 below their peak, analysts are suffering whiplash. But no matter how low they go, it won't be for long.


Andrew Leonard
August 19, 2008 11:28PM (UTC)

The ongoing fall in the price of oil (notwithstanding today's $2 rise), and corresponding decline in gas prices, was the single most popular conversational topic over the past 10 days, as How the World Works attempted to explain to relatives and East Coast friends just what it is that I've been obsessing about over the past year or so. Discussion gravitated to two main areas of concern.

1) The question of speculation. Although the consensus in the business press appears to be that the $30 drop in the price of a barrel of crude over the past month or two is a direct result of declining demand, many people understandably view the dramatic fall as convincing evidence that speculators drove prices far higher than fundamental market conditions would dictate. The question then becomes: How much farther do we have to go? Does the price continue dropping below $100? Could it plummet as low as the $60-$70 price range?

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2) The question of consumer behavior. As the price of gasoline falls, will Americans start driving again? Will SUV sales pick up? Will business models for venture capitalists aiming to cash in on renewable energy falter? For those who have been encouraged by the signs that Americans can and will change their extravagant ways, given the proper price signals, the possibility that a sustained fall in gas prices could get American motors running again is disconcerting, from an environmental perspective.

Energy analyst Geoffrey Styles offers a concise summation of Point 2 in his blog today, although he doesn't come to much of a conclusion other than to observe that "good old supply and demand have displaced imminent Peak Oil and a perceived commodity bubble as the dominant narrative." Fair enough.

As for Point 1, I was taken aback by an article in the Peninsula Qatar reporting that a British energy consultancy was predicting that the Saudis might soon cut crude oil production because "OPEC member-countries, facing increased government spending and rising inflation, will not be happy to see prices fall far below $100 per barrel." The idea that $100-per-barrel oil is now seen as a possible floor for prices rather than a heretofore unimaginably high benchmark just shows how differently the world views oil prices now than it did four or eight years ago.

Still, I remain convinced that in the long term, issues of speculation and short-term trends in consumer behavior pale before the long-term narrative, which, in my view, remains unchanged. The latest iteration of that narrative comes from Dallas Federal Reserve Bank president Richard Fisher who made the following comments Monday night, as reported by Reuters:

"Japan consumes 14 barrels of oil a year per capita," noted Fisher, a former deputy U.S trade representative who helped negotiate China's entry into the World Trade Organization.

"If China used the same amount per capita as parsimonious Japan, Chinese consumption would total more than 18 billion barrels a year, an amount that dwarfs our country's 7.5 billion barrels," said Fisher.

"Add that to new demand for oil stemming from India, the newest members of the European community, an increasingly prosperous Brazil and so on. For those trying to discern the long-term future of oil prices, this is considerable food for thought," he said.

In other words, enjoy that sub-$4-a-gallon gasoline while it lasts.


Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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