How much are you paying for gas? Today (5/27/08) where I live the average gas price is $3.91. This is a run up on prices of oil in the oil markets. But I don’t believe the cost is justified. There is an article on CNNMoney.com called Is $130 oil a bubble? that provides the point of view of each side of the oil cost situation. My viewpoint sides with the second half of the article and I captured my original thoughts on the subject in a post on March 3rd, 2008 called Bubbles are Bursting.
So let me explain a little further why I don’t think $130 oil is justified.
The price is in anticipation of a coming surge of oil usage from economies like China. The news tells us frequently about how China and India are growing and have a larger middle class. These statements are true, but somehow the story forgets to mention that this has been happening for two decades. The increase isn’t a spike, its a gradual incline. However, the price of oil is increasing at a rate faster than demand is growing.
There is no question that demand is increasing, so lets consider supply. This is trickier than demand because OPEC can affect this. Plus disruptions to pipes or off shore rigs can slow output. I do consider this an issue for price, but not to the extent that the price indicates. There are several projects underway that will tap new oil fields within the next three years. There are some in the Gulf of Mexico, Canada, and Siberia, just to name a few.
Finally, the last aspect is the cost of oil is priced in US dollars. The dollar is weak against many other currencies, so when a global market is in play you have to adjust to your purchasers. When the dollar rebounds the price of oil will go down just because the dollar is worth more. Sounds strange, but its true.
The question is when will that be? It is hard to say because moving people and goods around easily is good for commerce. Commerce is good for the economy. If people stop flying, driving, and buying then the recession will deepen. In addition to that, the cost of shipping will raise the cost of everything that needs to be shipped. This inevitably shrinks the consumers buying power.
As the CNNMoney.com article says, I too expect oil to go down and settle in around $80 by the fall (can you imagine the heating oil costs in the North East during the winter?). I also expect many new technologies to come into play for 2009 and 2010.