Everything You Want to Know About THE PRICE OF OIL But Were Afraid To ask!
Confused about oil prices? This page explains it all....
After a record peak of $147 in July 2008, the price of oil was reduced to $100 in September 2008 and to $37 by December. Erratic or what?
The world has learned that watching oil prices is a fool's game.
In September, prices were reduced by the producers in order to boost demand, so they can go up again. Like a retailer who reduces the price of something that's not selling well. The further collapse in oil prices since then is due to the casino like nature of our financial system, in which short traders can force prices downwards----but only temporarily. The world economic slowdown is also having a cyclical affect on the cost of oil. But whether they rise or fall, the only good relationship to have with oil prices, is one of cool detachment. Not one of being dependent on them.
Graph courtesy of the U.S. Energy Information Agency.
Today's Crude Oil Price (updated daily)
How it All Works
In a marathon meeting in early September 2008, the doves and the hawks of OPEC cobbled out an agreement to reduce the price of oil to $100 a barrel. They were chastened by the unprecedented fall in demand, due to unsustainable prices and all the people who are wising up, driving electric, switching to renewables and conserving energy.
In fact, the world cut back on demand so much that by September, there was a 31% oversupply of oil. That's what a $147 price tag tends to do!
Mr Bush's friends, the Saudis, are the short-term pragmatists in OPEC, realizing that high prices prompt us to switch to other energy sources. They're not that interested in the longterm, they run their entire country for the benefit of themselves and their minority elite. Saudi Arabia is more a personal fiefdom for the ruling family, than a country as most of us understand the term. Personal gain is what motivates the Saudis. But their country is a political basket-case permanently teetering on the edge of instability. How long they can hold it all together and hold the price of oil down is anyone's guess. Is it mad, or is it crazy, that in the West, we are dependent on regimes like this for our economic stability? By being so dependent on oil, we have given a terrible hostage to fortune.
Iran and Venezuela are the other significant players in OPEC. They are playing a different game to the House of Saud. They realize that the real game is a long game. They are determined not to sell themselves, or their people short. They are sitting on a precious and finite resource after all. From that perspective, $100 barrel looks cheap. They won't let prices go low again. The days of $50, $60 or even $80 a barrel are gone forever. The paradigm has shifted permanently.
As well as announcing a cut in the price of oil, the oil cartel that is OPEC, also announced a cut in production. This will, in due course, push prices up again, once demand is boosted by temporarily cheaper prices...
....this is the same dynamic that exists between drug dealers and their clients......
.....we are addicted to oil and will always be at the mercy of the cartel until we have our own, renewable energy sources.
And so it goes, the vicious circle of oil prices...
When prices go up, inflation rises, interest rates rise, economies become sluggish as investment and activity is depressed by high costs....this fuels a fall in demand for oil and an increase in people switching to green fuels....this causes the cartel to get worried and they cut back prices to stimulate demand, while at the same time reducing supply to ensure prices will rise again.....
And I haven't even mentioned the role of the speculators and money markets in pushing prices up. Here's an example of how they affect the price you pay at the pump:
Following the recent banking collapse in the U.S., and the uncertainty over what is going to happen, investors pulled their money out of financial products and institutions and poured it into commodities and....oil!
Suddenly, more people wanted to buy oil stocks and shares. There was a lot of cash floating around with no home to go to. Those boys down at Wall Street were busy outbidding each other, snapping up chunks of the oil industry. So, by the fourth week of September 2008, oil prices had shot up again to $127 a barrel.
But in less than six months, by the end of 2008, oil prices had collapsed to $37 a barrel.
And so it goes....to quote the catch-phrase of the late great Kurt Vonnegut...
....and so it goes....
......and so it will go.....
....on and on, until we jump off the oil rollercoaster....
And here's something else Kurt Vonnegut wrote, this time about oil...he was very interested in environmental issues...
Here’s what I think the truth is: We are all addicts of fossil fuels in a state of denial, about to face cold turkey.
And like so many addicts about to face cold turkey, our leaders are now committing violent crimes to get what little is left of what we’re hooked on.
So what IS going on with the Price of Oil?
Confused about oil prices? You're not the only one!
Okay, here's what my Insider Source says about all this:
How did prices collapse so quickly?
He says this is the result of short positions unwinding.
What's a 'short position'?
Essentially, shorting is selling stocks you don't own because you believe the price will fall. You borrow or rent them from the owners for a short time. These short-term shares are used by sharp traders looking to make a quick buck on the markets. It's essentially gambling. Informed gambling. They use financial instruments to bet that oil prices are going to fall. When they start offloading their stock, prices fall. Right now, they're all getting out of the market. Add to that the decline in economic activity all round the globe because of the credit crunch and you have a complete collapse in oil prices. Perfect storm. Even China's in trouble and reducing demand.
How low will prices go?
It's not inconceivable that they could go below $30-00, perhaps even $25-00, just temporarily of course.
Will prices stay low?
No way. Oil's a limited commodity. Takes thousands of years to produce. Prices gotta rise in the medium term. And when they do, they'll keep rising. When the world economy starts to recover from this recession, the era of cheap oil is effectively over. This current low price is only temporary---a blip against the irrevocable trend upwards.
How you can be so sure? In the current economic climate aren't all the old certainties up for grabs?
Hey, the marginal price of a barrel of oil is $70-00. That's the price it would cost to produce one extra barrel today. But today, oil's selling at about $40-00 a barrel. Loss of $30-00 on each barrel. The producers won't let that go on. They'll cut back production to stop it.
But how can oil be at its highest price last July and now it's at rock bottom?
The markets tend to overshoot in both directions. When it's a bull market and prices are shooting up, they go too high. Then the bubble bursts. Short-traders usually burst the bubble in over-inflated markets. That's why, much as we hate their cynical tactics, they have a function in the markets---no one else has the guts to burst a bubble. So when the bubbles burst, the markets go too far down. Think of a pendulum. The further it swings one direction, the further it swings the opposite direction as well. Stock markets are the same. The low price of oil right now is a temporary over-compensation for previous high prices. In the near future, we'll see the market come back to equilibrium.
So what's the equilbrium price going to be?
Hey, I'm not a fortune teller! But if you want to try an informed guesstimate, you could take the last peak and the current trough and work out the mid-point between the two. A price of $90-00 to $100-00 looks very likely as the economy comes back out of recession. Taking a longer view, prices will go above $200 once we start to feel the pinch of oil running out and panic sets in.
Mr Insider is never wrong. The blip of low oil prices is not something to build a gas-guzzling lifestyle upon. The high oil-price train may be a little further away than it was in July 2008, but it is still coming down the track and nothing can change that. The time to get your home geared up for renewable energy is now, before demand for green installation companies reaches a peak and becomes expensive. Everything goes in cycles and we are now at the beginning of the green energy cycle. Get in early. Get it done and then, even if oil prices are low for a while longer, it still makes sense to plug in your car to a free supply at home. And even if prices are low for a little blip, it's not doing the environment any good---for the sake of climate change we need to stop using oil, even if they were giving it away!
It looks like Mr Insider is right on the money. In mid-Feb 2009, the International Energy Agency, an organisation not noted for making wild or alarmist claims, predicted a "supply-crunch" in oil as early as 2010, which will cause prices to rise again.
It seems that recent low oil prices have caused oil-producing nations and companies to stop investing in technology and in the development of new types of oil fields to replace the old ones which are running dry. The new oil fields will not be as easy to extract oil from as the old ones and will require new methods and new investment.
But oil-producing states that have been depending on oil revenue to pay for their public services and infrastructure are feeling the pinch of low prices and are not reinvesting the revenue they are getting from oil. They need it to continue keeping their public services ticking over. And oil companies are trying to keep their shareholders happy with the good dividends they have grown used to. As a result, they too, have little or no funds left over for ploughing back into developing new fields and new technology.
Result? Oil CrunchTime coming NEXT YEAR!!!!
So, plug-in your car and get those solar panels on your roof before the next big hike, then sit back and laugh at the oil price game.
Price of Oil News Watch
Below, you will find links to the latest news stories on the vagaries of oil prices. These links will open a new window in your browser and take you away from my site. If you are watching prices, bookmark this page, as it is updated daily.