In May, I mused that the price of oil was too high. With the price of a barrel of oil just below $47 USD, is the price of oil now too low? The theories of why oil has fallen are pretty clear: the economy is slowing down and this is resulting in lower demand. But what is also happening is that a lot of large institutions have had to unwind positions and, perhaps, driving down prices more than they should.
However, there has been a lot of rumbling from OPEC, a cartel of 12 oil-producing countries which produces approximately 35% of the world’s oil, that the “right” price of oil should be $75 a barrel. If OPEC really wants to drive prices up again, it probably could be make a concerted effort to limit supply in 2009.
Russia, one of the world’s largest oil producer and not a part of OPEC, has already signaled that it wants to co-operate closer with OPEC but has stopped short of agreeing to a coordinated supply cut (for now). This does not bode well at all does it?
One of the other over-looking facets of this downturn is that the “green movement” has taken a back-seat to other economic concerns. It seems that the pursuit of alternative energy sources has slowed considerably. One supposes that everyone will get a bail-out but Mother Nature. Obviously, as alternatives to conventional fuel slows down, eventually the price of oil will rebound.
Will it happen over-night? Probably not but the same factors that existed before the credit crisis which drove the price of oil up (perhaps unjustifiably high) still exist (growing developing world, lack of alternatives, United States at war) and there are, unfortunately, too many interests working against a low price of oil. Could we see a price creep back to somewhere between May’s prices and today’s prices?
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