Oil Prices (2)

The factors I described in the last post have been working in both directions over the last few years. World-wide economic growth over the past decade created an enormous demand for oil. This demand reached peak in July, as China stockpiled oil for security during the Olympic Games. Productive capacity was unable to match this peak in demand, so the price rocketed up to $150 a barrel.

During the latter part of 2008, the world economy stropped growing and many western countries moved into recession. This caused a sharp decrease in the demand for oil. The politicians who control oil production have refused to reduce production, so the oil price has plummeted, as supply exceeds demand.

Motorists are really appreciating the drop in prices at the pump. However, we should not become complacent in response to the decline in fuel prices, because the high oil prices last year are a warning of what could happen in the future, if strong demand comes up against limited supply. When the world economy moves back to full speed, strong demand for oil will once again push hard against limited production capacity. The problem is that most of the easy oil has now been found. Production is declining at several of the largest oil fields. Many more oil discoveries will be made, but they will be much more expensive to bring on line, so much higher prices will be needed to make them economic.

The current low price of oil is probably temporary. Enjoy it while it lasts, but this is not the time to buy a bigger better gas guzzler.