Oil Sinks On Recession Woes

By Justin Gardner | Related entries in Business, Economy, Energy, Gas, Oil

Massive energy speculation mixed with much lower demand is driving the price down, down, down for the foreseeable future.

From AP:

A report by the Commerce Department showed that sales of new homes fell in November to the slowest pace in nearly 18 years, while new home prices dropped by the biggest amount in eight months.

“The energy markets are reacting first and foremost to bad economic news, and it seems like they’re almost waiting for something bad to occur,” said oil analyst Peter Beutel of Cameron Hanover.

A steady outpouring of gloomy economic news has pushed to the background events that over the summer may have led to price spikes, like OPEC’s announcement this month of unprecedented production cuts, Beutel said.

Prices have fallen 73 percent since July, with massive job layoffs and weak consumer spending eating away at energy use.

Now, I think it’s pretty clear that the economic news is only going to get worse before it gets better (perhaps much, much worse), so what does this do for oil prices?

Will consumers continue to drive less in hopes they can collectively keep their costs down?

Will OPEC continue to cut production to push up the price?

My guess is that it’ll be both and hopefully the energy speculators will stay the hell out of this and not try to game the market the way they did previously. Because I think it’s blatantly clear that Americans didn’t start driving THAT much less to drive the prices down nearly 75%. There had to be a massive dose of speculation going on there and once they saw the demand start to drop, they dumped their stockpiles on the market and the prices plummeted.

And to that point about energy speculation, would it be a good time for us to start putting more regulations on the type of trading that drove the prices through the roof? Especially during these tough economic times we need to know what the price of a barrel of oil will be.

Thoughts?


This entry was posted on Tuesday, December 23rd, 2008 and is filed under Business, Economy, Energy, Gas, Oil. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

6 Responses to “Oil Sinks On Recession Woes”

  1. TerenceC Says:

    This is what happens when money is made on money made. The cycle between slow market manipulation, taking profits, and commodity price depression used to take 20 years – because someone might notice otherwise. Now no one gives a s*&t, the cycle of manipulation, price increase, and commodity depression only lasts 9 years. If you really want to protect the markets from manipulation than tax the beejezuz out of gas when the price is depressed – because any price increases will create immediate attention from those whose pockets are at stake – your government. It’s important to realize what motivates the pigs at the trough in Washington – and lowering tax revenue is a biggie. It will also act as a stabilizer between the American peoples appetite for cheap fuel, short memories, shorter attention spans, and the peril the burning of fossil fuels pose to all of us.

  2. Jimmy the Dhimmi Says:

    My guess is that it’ll be both and hopefully the energy speculators will stay the hell out of this and not try to game the market the way they did previously.

    Sorry, Justin. Too late. The speculators are, in fact, the direct cause of the price drop. They are dumping all of the oil futures they were buying when the demand for energy was strong, and the price has crashed as a result. If you are going to blame speculators for the price increase, you must certainly blame them for the drop, since they aren’t “staying the hell out of it” when they are unloading their shares for whatever they can get for them.

  3. kranky kritter Says:

    Right Jimmi, that’s how the speculators get out, with a big crash.

    I’ll skeptical of the notion that everyday consumers are driving less as some sort of direct, voluntary, intentional effort to use less gas. People are leery of spending money in these times, so they aren’t driving to the store. All the people who lost their jobs aren’t driving to work. So I think the downward trend in consumption is in large part a simple side effect of bad times.

    People are in general sticking closer to home , though. I think. Not saying there is nothing to it, I just think that the vast majority of any given individual’s travel is a function of everyday activity and so is driven by that. I don’t believe we are seeing a direct change in driving behavior where people are letting their behavior be substantially dictated by a desire to conserve fuel.

    For many folks, it’snice to believe that, and it casts a hue of virtue over consumers, but I don’t believe it.

  4. mark Says:

    Personally, I think that Gasoline is relatively inelastic in demand, Hence, a small drop in demand leads to a rapid drop in price (and conversely a relatively small increase in demand would have a larger increase in price).

    I’m sure there’s a bit of speculation going on, particularly with the economy heading south faster than Canadian Geese in November. But I’m willing to say that speculation is playing a relatively smaller part of the price drop than simple supply and demand.

  5. Nick Benjamin Says:

    Small changes in demand mean big price shifts in something like gasoline. Demand is very, very stable. If you need two gallons to get to and from work you’re going to buy two gallons. It could be $20 a gallon, it could $0.01 a gallon. You will buy at least two gallons. Period.

    It’s the same for businesses. A coffee shop has to have coffee to sell. They don’t have a choice.

    Price is simply not a major factor in how much gas people buy. They need it, they buy it. Reducing fuel needs even a little is a huge hassle. Every year before this one summer driving season was also a bitching season because nobody likes having to pay $3.00 for something that was only worth $2.00 six months ago. Nobody changed their behavior very much.

    It wasn’t until this year, when it gas hit $4.00, that people actually changed their behavior. At all. Sales of hybrids took off. EVerything else tanked. And tanked so spectacularly that even the storied Toyota took a loss. It’s first. Ever.

    I’ve always been skeptical of the influence “speculators” had on gas prices. Oil is not real estate. Real Estate speculators actually buy houses, which increases demand, and market equilibrium is not restored until all of them sell. Oil speculators never buy actual oil. They buy the right to oil that will be pumped and delivered at some future date. They have to a) sell that right before the oil is delivered, or b) also buy a facility to store oil.

    So speculation just makes oil prices a lot more volatile. It’s a pain, but it’ll benefit us as often as it screws us.

    BTW, don’t be too hard on options contracts. They sound silly, but they actually save lot of money. One central market selling all the beef in the country is a lot more more efficient than every farmer hiring a sales staff. It’s also helpful because it allows farmers to get paid for things they haven’t grown yet. Your average farmer only has goods to sell a few times a year (at harvest).

  6. Justin Gardner Says:

    Sorry, Justin. Too late. The speculators are, in fact, the direct cause of the price drop. They are dumping all of the oil futures they were buying when the demand for energy was strong, and the price has crashed as a result. If you are going to blame speculators for the price increase, you must certainly blame them for the drop, since they aren’t “staying the hell out of it” when they are unloading their shares for whatever they can get for them.

    You do see that you just proved my point, right?

    The speculators saw the demand start to drop so they dumped their shares. That’s what caused the price to plummet and become realistic again. Because now it was tied much more closely to actual supply and demand instead of the phony supply problem everybody thought existed in the first part of the year.

    You know, when I kept on arguing that there was no supply problem and that energy speculators were just hoarding supply and you argued I was full of it?

    Merry Christmas!

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