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July 14th, 2009

Will Our Demand for Oil Ever Be the Same?

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Oil is regarded as a volatile commodity because its cost has the ability to fluctuate greatly within a short period of time. Last July prices soared to record highs of over $141 a barrel, only to fall off to nearly $30 a barrel last December. After oil prices reached their peak, a massive pull off in consumer demand caused prices to fall. The experts say that with consumer demand still low, the price of oil could stand to drop even further below its current price at near $60 a barrel. One analyst has even predicted oil to touch down briefly at $20 a barrel:

Philip Verleger, a business professor at the University of Calgary and visiting fellow at the Peterson Institute for International Economics told CNBC’s July 8 “The Kudlow Report” how the cost of oil might drop. Verleger explained why the current price of oil – at $60 a barrel, off its $72 highs, is still way too expensive for the market and why it could come tumbling down to $20.

“The $20-oil story is relatively simple,” Verleger said. “I picked $20 as where it could go briefly at the bottom. Oil was $31 in December, got up to $70 a few days ago. The price shouldn’t have increased. We have a huge surplus on the world market even with the OPEC cuts. It’s running a million and a half barrels a day. I’ve been following this since 1971. We have never had a 12-month stretch with such a large surplus.”

For consumers, when oil prices fall it’s the equivalent of putting money in their wallets. For oil-producing countries, it’s like taking money out of their wallets. Saudi Arabia’s Oil Minister Ali al-Naimi said back in December that $75 a barrel would be what his country considers to be a fair price. For both parties’ sake, it’s all about striking a natural pricing balance between supply and demand. But if the demand isn’t there, that “fair” price will only go down.

The Wall Street Journal’s Environmental Capital blog raised the notion yesterday that the demand for oil may never fully recover, even after the economy does. Around the world countries are striving towards lessening their oil consumption while promoting technologies that produce greater fuel efficiency.

Here in the U.S., nearly the entire auto industry is making strides towards more fuel-efficient vehicles. We have hybrid vehicles, brands that use “flex fuel,” even billion-dollar government loans for brands willing to advance their “green” technology. Exxon Mobil Corp. just announced plans to spend $600 million to develop an alternative fuel from algae.

Will the demand for oil ever recover, or are we set to see gas prices (thanks to oil prices) slide for the foreseeable future?

(hat tip: Fundmastery)

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5 Responses to “Will Our Demand for Oil Ever Be the Same?”

  1. Lucia Says: July 16th, 2009 at 12:19 pm

    As long as consumers are struggling, demand for oil and fuel will remain low. Green-tech won’t replace demand for oil because the technology is too expensive and can’t return a profit for investors if most consumers can’t afford to switch. Gov’t mandated green tech programs won’t increase demand for hybrids and solar, etc, because consumers are constrained by lack of jobs and reduced income.

  2. Tim Manni Says: July 16th, 2009 at 12:26 pm

    Lucia,

    You’re right: the foundation here is “as long as consumers are struggling.”

    However, in the long run do you think “green” technologies will begin to replace oil demand as well as get less expensive?

    Thanks,
    Tim

  3. Lucia Says: July 16th, 2009 at 7:37 pm

    Are you supposing by “in the long run” that lending standards will return at least to 1990 levels, and that unemployment will stabilize at around 6%-8%, and taxes will remain about the same? A better look is at history, back to the Carter years when the gov’t tried to grub stake the green tech industry. The lesson learned from history is that if the product isn’t something consumers want, they aren’t going to pay for it.

  4. Tim Manni Says: July 17th, 2009 at 9:15 am

    Hey Lucia,

    I wasn’t supposing anything by including future possibilities in my questions. We’ve all done a lot of talking about the present and how presently things are so bad that programs, legislation, etc — not limited to any specific one — is a bad idea right now b/c consumers can’t afford to pay extra for anything.

    I think a lot of different individuals will say that things may never or will never return to the way they were, especially if several initiatives like the financial reform take hold because they are designed to change the scope of an entire industry. You’re history is the best lesson. I can’t say for sure what the unemployment rate will be in two, five or ten years. Lending standards should loosen up as the economy gets get, but as I said, the credit card and financial reform could keep credit tight for years.

    Thanks for getting back to me, thanks for commenting,
    Tim

    Lastly

  5. Alessandro Machi Says: July 19th, 2009 at 8:40 pm

    I just want to point out the possible link between rising oil prices and the false pumping of the stock market from the excess oil profits. I think that is what happened in 2008.

    Oil profits that can manipulate the stock market can only do it for so long, then the market will fall. http://dailypuma.blogspot.com/2009/06/when-oil-prices-rise-is-it-possible.html

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