There are a number of free-market reasons behind the recent drop in oil to a four year low: one is slightly lower demand - but demand is still way too high for this kind of drop with normal market dynamics.
Demand is off maybe 5% year-to-year while the price is down to $40+ from $140+ per barrel. Actual demand was greater 4 years ago than today, yet the price is the same while output is not off at all. Go figure! or read on. [BTW: One barrel (bbl) is equivalent to 42 US gallons or 117 liters. The common word 'barrel' aka "drum" which is used in industry here, is a different measure and actually holds 55 gallons.] The second free-market force is that the supply of oil, which can be effectively controlled by an illegal Cartel, has not changed very much - because of Arabia and Kuwait. Their politics and other strategies are well thought-out and go beyond market forces. You have to admire the insight and sophistication of their greed. They should call it Gekko-land. The two big Arab swing producers would need to cut production far more than normal, and do it alone, to maintain a higher price - and they could easily do so - but are choosing not to for now. And they also are (probably) using this lack of action on supply front to impress a new US administration, and to ultimately influence Obama's future policy for their region (quick removal of our troops). These rich and savvy people realize that the PAC money which has flowed from oil interests to the 'other party' in the past 8 years is of no influence now, and that the first 100 days of the new administration is of highest importance - and will be when the most dramatic new legislation can come in easily - and they do not want to see that legislation be negative to OPEC, or even mention them by name. Another market reason for the price drop is that non-OPEC members in the over-populated third world still keep finding more oil, and they can ill-afford to cut output, due to debt and poverty at home. A fifth but minor reason is that coal-to-oil technology is contributing more than ever to supplies (in a few regions with lots of coal like South Africa). However, coal prices have risen like oil, but have not fallen as fast in recent months. Here is a decent article - and refinement of the expected date for Peak-Oil: http://seekingalpha.com/article/106191-peak-oil-s-bell-is-ringing A few further points to consider: Coincidentally, the best estimate for exact date of the Hubbert peak looks pretty close to December 2012 <g> The sixth and most important factor in oil pricing, but not a direct implication of the article above - is that the recent downturn in OPEC-permitted pricing was carefully *planned* to some extent, due to the miraculous trend in biofuels, and due to a strategy to influence that next year. This factor might override all the others in importance. IOW the present drop was planned (but may have gotten out of hand) to counteract the monster boost in biofuel production which followed the 2008 record grain harvest in the USA, and the massive amount of new money put into conversion plants here. That really means that this drop is (partly) artificial, which has some degree of real market influence as well - but accelerated for a specific anti-competitive purpose. With plausible deniability, of course. The 2008 harvest numbers are still not firm, as there was a lot of late grain crops planted, which are easier to harvest when the fields freeze, so they are still coming in at a record pace and this will be ongoing all the way up to new year's day, before the final tally is known. But even the low range of numbers is incredible. The American farmer is prospering like never before in our history and without this we would be in one hell of an economic fix. The Oil-Cartel strategy is that keeping the oil price down this winter will influence the 2009 planting season - since the price of biofuel will determine the profit potential of the crops (mainly corn) to the American farmer; or stated another way, the price of the grain crops is dependent to some extent on the pump price of petroleum. Most crops are presold, and the present price declines in corn futures for instance, are reflected directly in planning for next year's plantings - since the options price is off significantly. Bet you have not seen this suggestion in print, however, although the rumors are circulating ... But it stands to reason that if the *perception* is that low oil price will be off for several years, then that will seem too low for the farmer to profit in 2009, as they have in 2008. Ergo less acreage will be planted and some of the ethanol processors will go belly up as well. And the massive investment into biofuel processing and R&D will die out. That is the hope of OPEC, and it is not unrealistic. They have done this once before. The desired effect is to put many of the higher cost producers out of business immediately - even if there is a large 2009 planting. OPEC did this before in the early seventies with a burgeoning biofuel industry. It worked then but prices were kept low for a long time - as we were not close to Hubbert's Peak back then, as we are now. The domestic biodiesel industry is actually approaching partial collapse now since costs there (soybeans and canola) are higher and subsidies are less. It has more than 2 billion gallons of installed production capacity from more than 170 plants in 40 states. They need to get nearly $2 gallon to expand this further in 2009, and that price is no longer available to them at a very critical time unless new legislation *demands* that this price be paid by the blenders - and that is under consideration. The domestic ethanol industry numbers is 5-6 time larger than biodiesel and can function at a much lower price per gallon. >From 2006 to 2007, ethanol production increased approximately 33 percent, from >4.9 billion gallons to 6.5 billion gallons. That increase comes on the heels >of a 26 percent increase 8 between 2005 and 2006. The month to month numbers >for 2008 have been 40-50% higher than 2007 and the annualized rate of >production is now believed to be able to reach the "magic" one billion gallons >per month level early next year! That is a closely watched number as it >represents ten percent of usage. 2008 production will be less than 11 billion >gallons, but current production is .9 billiongallons per month, that is >indisputable. 2009 production will be higher than 11 billion (unless the OPEC >strategy is successful - because of new facilities coming online (if enough >grain is available). Those kinds of increases are unheard-of in modern >ag-business. For comparison US consumption of motor fuel is peaked in 2006 at about 400 million gallons per day - 12 billion per month (which includes blended fuels) and has dropped about 8% in the two years since then. When you deduct the ethanol and biofuel contribution at present rates (year end 2008) then that ratio of fossil to biofuel in the blend is now about 11:1. Back in 2005, "experts" were say it would take 10 years to reach the level of 10% contribution, but we are 'almost there' now after only 3 years - due to the massive shifts in priorities. This is the root cause of the present drop in oil prices IMHO and normal market forces are secondary. With both biodiesel and bioethanol, capacity can be pushed higher than the officially listed amount fairly easily - if the pump price is right and the feed stock (grain + biomass in the future) is fairly priced, since much of the limitation is in intermediate storage facilities. It is risky for an outsider like OPEC to try to manipulate this because they could end up boosting production if they do not get everything right. The American farmer is well known to take risks that seem unwise in terms of planting more than they should. The bioethanol industry is much larger than biodiesel and the output is more often pre-sold via options to blenders (not always to big-oil) and this can make getting real numbers harder - but it will be huge - much more than OPEC thought it would be. This is a major reason that the Cartel and US big-oil allies, are in no hurry to lower petroleum production now, to raise prices - since they want the "perception" of low expected pump prices well into 2009... plus biodiesel plants which did not presell output (through futures) are in trouble, and a few are going under already. Moral - "don't get greedy when times are good" and lock-in those profits. "Buffet (the new Simon) sez" that rich investors are always the ones who "sell too soon". One goal of the present low price, then, is to influence and to forestall another massive spring planting of crops in the USA - which this coming year will make far greater use of formerly unproductive biomass, such as corn stovers and hay. This is due to new technology. OPEC is very interested in how this new factor of lower-priced feedstock will translate into production. They will not make major supply moves in oil until this factor is known. When Saudi Arabia buys a supercomputer - and they own the sixth most powerful in the world - it is not for military use, but strictly for economic use for their large cadre of hired guns: economists from MBA programs in the USA. This computing power is used primarily for figuring out the supply and demand dynamics in every market - so as to extract the best possible pricing strategy and to weigh the repercussions of what they plan in advance. The Arabs now are both smart and fortunate (as is the USA) and we should not look at the present low price of gasoline as any kind of blessing. IMHO, it is part of a well-thought-out plan. Jones
