Oil Prices Starting To Dip: "Demand Destruction"

Oil Prices Starting To Dip: "Demand Destruction"

I saw this in the Idaho Statesman today, but this version appears in the July 17, 2008 La Crosse, Wisconsin Tribune, and echoes a prediction that I linked to a few weeks back by economist Alan Reynolds:

Oil prices fell sharply Wednesday for the second consecutive day, and the cumulative drop of $10.58 a barrel for crude has sparked hopes that this year’s steep rise in prices finally may be reversing.

Contracts for next-month deliveries of oil, called futures contracts, settled down $4.14 to $134.60 in Wednesday trading on the New York Mercantile Exchange. That was on the heels of a drop of more than $6 a day earlier.

It’s too early to say whether the sudden drop reflects the start of a massive selloff that could bring down oil prices on a sustained basis to less-punishing levels. But oil analysts think that the trend will be down soon, whether or not this week marks the turning point.

Today the good news continued, as this July 17, 2008 Bloomberg report tell us:

July 17 (Bloomberg) -- Crude oil fell for a third day, the longest losing streak for a month, on speculation slower global economic growth is curbing fuel consumption.
Crude has plunged more than $13 from last week's record $147.27 on falling U.S. gasoline purchases. Economic growth in China, the world's second-largest oil user, was the slowest since 2005 in the second quarter. Plans for renewed diplomatic contacts between the U.S. and Iran eased concern a conflict will cut supplies from the Middle East's second-largest producer.

This is really no surprise. Prices for commodities a function of both demand and supply--and like PV=nRT (the gas law equation), you push down on any part of the equation, and some other variable goes up. Prices go up enough, and for commodities that are not truly essential, demand will drop. Demand falls--and prices fall. Prices rise--and the supply of the commodity (or some adequate substitute) rise, as greedy people look for ways to get rich.

One of the reasons that the left insists on seeing rising prices in terms of evil corporations (and never in terms of greedy governments, like those that make up OPEC) is that they simply refuse to understand economics. In a free market, every individual makes decisions. Those decisions may be foolish, or they may be smart. They may even be thoughtless. But the summation of all those individual decisions is surprisingly intelligent--as long as wages and prices are allowed to rise and fall without governmental intervention.

American demand for petroleum has fallen quite dramatically of late--as this June 30, 2008 Reuters news story reports:

NEW YORK, June 30 (Reuters) - Weak U.S. demand for gasoline have kept supplies higher than seasonally normal, putting downward pressure on gasoline differentials in oil markets east of the Rockies, traders said on Monday.

According to revised U.S. government statistics, U.S. oil demand in April fell by 4.2 percent -- the lowest level in six years -- with gasoline demand falling over one percent, traders said.

And not because Americans are concerned about Mother Earth, or worried about global warming, but for one simple reason: high prices told them that a commodity was in short supply, and in the one way that I guarantee will get everyone, selfish or selfless, to respond.

I'm not expecting gasoline to go back to $1.11 per gallon, what I was paying when I first arrived in Boise in late 2001. I think anyone who runs out and buys a gashog based on the expectation of $2 per gallon gas is (even if it gets there) better have a very good reason for this. (And there are a few people that may need monstrous vehicles for specialized purposes.) Because you can be sure that if we do get back down to $2.50 per gallon gas, it won't stay there for long. On the other hand, if you find someone selling their brand new 4x4 for half the new price--you might save enough on the purchase to pay for the gasoline to feed it! But few people are quite that irrational.