Will Our Demand for Oil Ever Be the Same?by Tim Manni
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)