At $147 per barrel on July 11, oil certainly kept up with its well-earned moniker of being the "black gold." This morning, oil isn't looking too much like "gold" anymore as it fell to a new 3-month low of $107.
Oil's fall from gold-um is due to a whole raft of reasons. First and foremost, the speculative bubble has burst. When gasoline prices hit $4 a gallon in the United States and over $9 dollars in Europe, drivers around the world started to tighten their belts and began driving less. Subsequently, oil demand fell and oil inventories started to rise. With that rise in inventories, oil and gasoline prices started to fall. Further, the high price of oil had created an environment where new oil supplies had been coming on line to take advantage of the attractive, high prices. This, too, added to the increased inventories. You can also expect future new sources oil to come on line. Those new sources had been drilled or are in the process of being drilled in response to the previously high oil prices and demand. In addition, oil usage is being naturally taken down a weak economy in the United States and one that appears to be spreading throughout the world. Finally, the United States dollar has been gaining strength after falling for so many years. Because oil prices are so closely tied to the U.S. dollar, the stronger dollar is forcing prices down.
My guess is that oil will keep falling to a least $80 a barrel and gasoline should go below $2.50 a gallon. That price could be achieved by year's end. However, the conga-line of tropical storms that appears to be heading towards our oil production facilities in the Gulf could cause that eventuality to be delayed until sometime in the first quarter of 2009. I would also expect, based on my years of investing, that oil prices could hit $60 a barrel as traders "overreact" to the falling prices of oil. However, I think that, ultimately, $80 is the probable low price that we could see in 2009; and, I would expect prices to go back above $147 a barrel, next year, as drivers and consumers incorrectly think they can start wasting oil and gasoline, again. (Please note: This is an opinion and my guess. If I was always accurate, my name would be Donald Trump, or something, and not Cranky George).
The problem with this momentary drop in oil prices is that it will take the heat off of our politicians to do something. For sure, the Democrats will use the drop to avoid the issue of drilling in Alaska and off of our East and West coasts. Once again, we will probably lose another year in creating new oil supplies while oil prices are down. But, the price will go up as the inevitable world demand for oil and oil products increases. Mark my words, in the Summer driving season of next year, as the price of gasoline probably goes well above $5 a gallon, the same debate over drilling will start up again. And, once again, that same old and tired argument will be used that says it will take 7 years before we see any new oil supplies. Expect the Democrats to use the same diversion of pitting America "against" big oil and big profits. Congressional hearings are sure to be held to make America think that something is being done in Congress. Once again, we will hear all this talk about new and green sources of energy. Green sources which will probably be just a far out of reach as they are now. Finally, you will hear the same talk about oil speculators and how the oil companies aren't drilling on the land they already have leases on.
I just keep wondering when the American people will wake up and realize the fact that our own politicians are more beholding to a few environmentalists than they are to the people who elected them. Will it take five dollars a gallon? Six dollars a gallon? Or, fifteen! You guess is as good as mine.