Oil Keeps Spilling, Prices Keep Dropping?

Posted: May 19, 2010 8:50 AM by Dave Baker
Updated: May 19, 2010 8:50 AM

As we've learned in the past, prices of certain things can be influenced by simple supply and demand. Oil and gas prices are some of the more noticeable supply and demand influenced ups and downs we see on a daily basis. It has seemed over the past few decades, that any hiccup in the system can cause sharp increases in price.

For example, shortly after the 9/11 attacks, I saw gas lines, and the rumor going around was that gasoline was going to shoot up to five dollars a gallon! Gulf War II and the 2005 hurricane season are other examples of prices spikes. But in recent years, there is more of a global influence on oil and gas prices.

The crazy jump in 2008 where gas was over four dollars a gallon was a combination of record low supply and record high demand. But this wasn't just our fault. The economies of China and India were growing at record pace in 2006 and 2007, and millions of people were first time car buyers. Those traditionally poor countries weren't in the formula when it came to predicting future prices, and before we knew it oil was nearing $150 a barrel! In 2009, because of crumbling economies, massive swings in currency values, and us changing our consuming habits, the price crashed again, dropping over 100 dollars a barrel, and gas prices tumbled below a dollar in some states!

For the last year or so, the prices have stabilized and have remained nearly constant. But now, the Deepwater Horizon Crisis has been wasting thousands of barrels of oil a day. We're spending billions on protection and clean up. But where is the hiccup? The price of a barrel of oil has dropped from almost $90 a barrel at the beginning of May to just under $70 this morning. Why are oil prices dropping? It's a global thing.

First, gasoline supply is high. Oil supply is down slightly in some cases. As long as there is plenty of oil and gas out there, the price won't rise much. Demand is increasing as we move into the summer driving season, but the world economy is still struggling. So recreational driving, or vacations might be on hold this summer. So any increase in demand will be sluggish at best. Our driving habits have changed since the price spike in 2008. Now, some of us have returned to our old ways, but maybe more of us will continue to drive smart.

What seems to be the main trigger this time is the the European Union and the debt crisis they face. As western Europe continues to cope with the economic situation in Greece, the thinking is the value of the Euro currency will continue to drop. This means Europeans will have less buying power with their currency, and demand for oil could drop. If the demand drops, or stays the same, and supply continues to be high, the price will continue to fall. Much of this is speculation (like in 2008), so don't be suprised to see the market re-set itself in the near future.