The market is a cruel mistress

Friday, December 12, 2008

Gasoline prices have fallen below $1.50 a gallon in Le Mars for the first time since December 2002. The roller-coaster ride that brought gasoline prices near $4.00 a gallon this summer is on steep ride down.

No one is really sure how low it will go, or when it will begin to rise again. Yesterday, the International Energy Agency (IEA), an adviser to industrialized nations forecast that global oil consumption will drop for the first time in 25 years. The economic downturn here and in Europe and slower consumption in China will reduce demand, something not seen since 1983.

The IEA expects oil demand this year to drop by 200,000 barrels a day to 85.8 million barrels a day. Their forecast for next year is for consumption to recover somewhat next year, although at a much slower pace, as the global economy recovers in the second half of 2009.

As you may imagine, this news is not welcome to the folks to have profited from the meteoric price increases of earlier this year. It appears true market forces are at work, with the price of oil falling more than 70 percent since this summer. Oil futures fell to $40 a barrel last week, after rising as high as $147 a barrel in intraday trading in July.

The OPEC cartel is expected to meet next week to cut production to prevent a complete price collapse. What a shame.

It is ironic that the same people we were begging to produce more oil a few months ago are now overstocked and looking for help to stabilize prices. It appears that Russia, which has benefitted greatly from high oil and natural gas prices, will cooperate in reducing capacity and may even join the cartel.

However, non-members like Norway and Mexico have ruled out cutting production. The true laws of economics are now at play, and nations that have depended on oil revenues will be reticent to help their competitors.

The entire situation is their own fault. The constant squeezing of the consumer choked the goose that lays the golden eggs (or uses unleaded) and it will take time to recover. But this time, we hopefully will hedge our bets on other energy sources so these vile people can choke themselves.