Thursday, May 31, 2012

Falling Oil Hits $87.60 and Obama Haters & Oil Company Conspiracy Theorists

Yesterday brought another big drop in oil prices, with oil for July delivery closing at $87.60.  Sharply falling oil prices are bringing relief to consumers and should do one more good thing on their way down: destroy the credibility of those who variously said President Obama or an oil company conspiracy caused rising prices.

Oil is down $22 a barrel from its 2012 peak, and the price drop is showing up at the pump. I paid yesterday $3.42 a gallon in the Hershey, Pennsylvania area, or 54 cents lower than the painful peak $3.96, at the same station, about 8 weeks ago.  I expect to see another approximately 15 cents decline in the next 3 weeks where I gas up.

The cause of the recent price declines is largely softening demand and a growing belief that the European economy (one-third of glogal GDP) may be in early stages of depression.  As a result, some of the best macro-economists and monetary experts in the world have concluded that the Euro is doomed--going much beyond a simple Greek exit--and that its demise will not be orderly. 

More are concluding that Germany simply won't be able to shake the ghosts of the hyper-inflation of the Weimar Republic to take the necessary steps to end the run on the Euro and banks across Europe.  The result will be a deepening economic contraction that could lead to 20% unemployment across Europe and much less oil demand.  The oil markets may be signaling that the risks are rising of this dire view becoming reality.

Yet, the geopolitical pressures on oil include supply.  And this week the news was bad from the international effort to make Iran credibly give up its efforts to build nuclear weapons.  This may end a period when cooler voices were dominating this issue and cooling oil nerves.

Through all the pressures, the oil price remains a result of world pricing that reflects ultimately the fundamentals of global oil supply and demand.  Enjoy the falling prices, while they last.  But remember the last time oil  was really cheap was in December 2008, as the world stood at the precipice of a global depression, with economies sharply contracting around the world.

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