Thursday, September 14, 2006

Basic Economics Sinks Gas Prices

Sphere: Related Content

Perhaps to as low as $1.15 a gallon:

Fear of disruption focused on fighting in Nigeria, escalating tensions over Iran's nuclear program, violence between Israel and Lebanon that might spread to oil-producing neighbors, and the prospect that hurricanes might topple oil facilities in the Gulf of Mexico.

Oil traders bet that such worrisome developments would drive up the future price of oil. Oil is traded in contracts for future delivery, and companies that take physical delivery of oil are just a small part of total trading. Large pension and commodities funds are the big traders and they're seeking profits. They've sunk $105 billion or more into oil futures in recent years, according to Verleger. Their bets that oil prices would rise in the future bid up the price of oil.

That, in turn, led users of oil to create stockpiles as cushions against supply disruptions and even higher future prices. Now inventories of oil are approaching 1990 levels.

Wow, that whole suplly and demand thing really does work, huh? It astounds me when people don't understand basic economics. Free markets fluctuate, that's part of the equation.

This cannot sit well with the Democrats going into the election cycle. If I were the GOP, I'd hammer this issue home every opportunity they get.


Should oil traders fear that this downward price spiral will get worse and run for the exits by selling off their futures contracts, Verleger said, it's not unthinkable that oil prices could return to $15 or less a barrel, at least temporarily. That could mean gasoline prices as low as $1.15 per gallon.

The ripple effects from lower gasoline prices would be huge. I know in my case I've been getting beat up by high gas prices as I pay for my employee's gasoline costs. I will now see higher profits which means more money going into other sectors.

This will assist all industries as transport and logistics costs will be reduced dramatically. Trucking companies I was using were charging as much as a 20% fuel surcharge.

Update: More at In From the Cold.

No comments: