The Economic Situation (10) - Balancing Oil

An economic model that can accurately assess and weight all these factors together to determine the future price of oil does not exist. We simply do not know how severe some of these effects will be. However, we can be sure that all these factors will come together in the oil market to decide the price. I am happy to leave this question to the market to decide.

I do not have any revelation about the direction that prices will go. In the short term, I expect that ail prices will continue to go down as the weakness in the American economy bites and as consumers respond to high gasoline prices.

On a more cautionary note, I have been amazed out how easily we have coped with oil prices above $100 a barrel. We have grumbled a lot and carried on doing most things that depend on oil. Air travel had not declined dramatically. I once thought that prices at that level would cripple the world economy, but the events of the last few months have proved that this is not the case. The credit crunch has had greater impact than high oil prices. I am sure that OPEC have noticed this too. They do not have the ability to control oil prices, but given that they have had some extremely good years, they will be able to bring significant cuts in production to prevent oil prices from falling to far. Therefore, I suspect that we are unlikely to see prices go much below $100 per barrel. That is not a problem as the world economy will be able to cope.

Wise observers will be aware that market prices sometimes overshoot. We have probably just seen oil prices overshoot on the way up. They may also overshoot on the way down.

In the longer term, the pressures on oil prices are mostly upwards. How fast and how far they will go up will depend on how quickly new supplies can be pumped and how quickly the world can reduce dependence on oil. No one knows the answer to that except God.