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Is The Oil Market Collapsing ?

by @ 9:23 am on December 6, 2008. Filed under Credit Crisis, Economics, Gas Prices, Oil Prices

That’s what one industry executive says:

Gulf Oil CEO Joe Petrowski said on Wednesday that the price of oil could sink to $20 per barrel, and there is a chance gasoline prices could drop as low as $1 per gallon by early next year.

Speaking at a South Shore Chamber of Commerce breakfast at Lombardo’s in Randolph, the Brockton native said that after speculators drove oil prices up, there is a chance that the market will overshoot on the way back down, resulting in much lower prices at the pump.

As fanciful as that might seem considering that it was only a few months ago that gas prices were approaching, if not exceeding $ 4 per gallon, the downward trend does seem to be continuing:

COLUMBUS, Ohio (AP) — Oil prices hit four-year lows Friday as employers cut the highest number of jobs in 34 years. The continuing decline in prices is so dramatic and so sudden that it is raising the prospect that gas prices could soon fall below $1 a gallon.

The worst jobs data in 34 years on Friday just added more fuel to the deepening global recession as U.S. employers slashed a far worse-than-expected 533,000 jobs in November and the unemployment rate rose to a 15-year high of 6.7 percent.

A gallon of gasoline can be had for 50 cents less than it cost just last month, and people are starting to talk about $1 gas.

Granted, gas prices are a long way off from that magic number last seen in March 1999 when prices were at 97 cents a gallon, according to motor club AAA. Prices at the pump fell 1.6 cents overnight to $1.773 nationally, according to AAA, the Oil Price Information Service and Wright Express.

But consider what has happened since July 11 when a barrel of oil hit a record $147.27 and a gallon of gas was $4.117 on July 17. In less than five months, oil has fallen 72 percent.

Just this week, in which the National Bureau of Economic Research determined that the U.S. is in recession, oil has fallen 25 percent.

On Friday, light, sweet crude for January delivery settled at $40.81 a barrel on the New York Mercantile Exchange, down by nearly $3 per barrel. Prices fell as low at $40.50, levels last seen in December 2004.

Gasoline futures for January delivery tumbled to 90 cents.

The main reason for the collapse, of course, is the deteriorating economic situation:

The jobs number suggests that demand for gasoline, which has been running well below year-ago levels even with the cheaper prices in the last several weeks, will fall even more in early 2009 as work-related driving plummets

Not just work-related driving, but trucking and other uses of energy will go down because of decreased economic activity.

This is one of those situations where a drop in the case prices isn’t necessarily a good thing, because it means things are getting worse.

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