Projo Cars Blog

Was this year's run up in oil prices just a flash in the pan? Now they are declining - to less than $115 a barrel - can we return to our Hummer-loving ways?

Hardly.

The run up to a record high of more than $147 a barrel in early July was prompted by a number of factors, all of which continue to play their part. Let's go through the major ones:

Fundermentals. The increase in global demand for oil from Asia, particularly the fast growing mega economies of China and India, is real. It applies to all commodities, not just oil. Certainly that demand has been ramping up for a while but for whatever reason the reality hit home this year.

(Why does reality sometimes take so long to sink in? Dunno. But take the newspaper industry - please. At the turn of the century, we were adapting to the Internet by developing our own Web sites, almost as a sideline. Now we are in a fight for our lives, from The New York Times on down.)

Weak Dollar. With oil priced in dollars, the weakening dollar just meant it took more dollars to buy a barrel. To what extent the current strengthening of the dollar is contributing to the firming of prices, I do not know. But it is a factor.

Decreased demand for gasoline. With gas prices hitting $4 a gallon in the U.S. and double that overseas, we consumers reacted in a couple of ways. We drove less - it was the summer of the "staycation" - and we started buying smaller cars that consume less. Not that we were rushing out to the dealers' lots. But clearly those folks in the market for a new car were looking at smaller cars, and buying them.

Political instablity. Unstable politics roil most of the world's leading oil producing countries - the nations in the Mideast, Nigeria, Venezuela, for example - and pops in the price are often caused by disruptions of supple due to this or that outbreak of violence.

Speculation: The favorite bugbear of the outraged. To an extent, the runup was a speculative bubble. Question is, to what extent? From what I have been reading, $30-to-$40 of the overall price was due to speculation.

Many people - and politicians pander to them (when does a politician not pander?) - are outraged by speculators whom they claim have no business in the marketplace as they add no value but merely cream off profits for themselves. True, when they are successful. But for every successful speculator, there is a loser going the other way which is usually described as getting in too late.

As my stockbroker likes to say, Buy on the rumor, sell on the news.

And as for outlawing speculation, you might as well legislate against the rain. As I've said before, when prices go up for anything, people will get in to make money. Certainly it can be taken to an extreme; witness the so-called sub-prime mortgage crisis that has practically taken down the world economy let alone a bunch of erstwhile Grand Houses on Wall Street.

The real estate bubble was partly created by the refinancing frenzy based on the rising value of houses - and late comers were welomed aboard by crooks and charlatans straight out of Huck Finn!

As far as oil prices are concerned, the speculative part of the bubble is being wrung out and prices are expected to stabilize around $100 a barrel.

But that's still a remarkable level and well above the $60 of a year ago and the jolt has pushed small, fuel efficient cars and alternative fuels cars to the foreground/ That's a good thing as far as the environment is concerned - if you believe in global warming, which I realize many people do not.

As oil and gas prices decline, is there any reason to want to go back to the era of the SUV? I suppose the reasons the people bought them in the first place still apply - comfort, safety and social prestige, or "What will the neighbors think?"

The first two reasons are solid. The third is not, but that does not negate its enormous power in influencing buying decisions. But it seems to me that big SUVs carry no social prestige at all after our summer of discontent at the gasoline pumps. And I don't think that is about to change even if oil prices do fall to around $100 a barrel and gas prices come down commensurately.

However, the fundermentals of increased global demand have not changed any more than the politics of most oil producing nations. Certainly, there is no balance in demand and supply and the runup in prices this spring and summer has been a wakeup call to the risks posed by wallowing in the trough of heretofore cheap energy.

- Peter C.T. Elsworth

 Tags  Oil prices

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