Light crude oil prices are finally dropping, much to the relief of motorists. Bobby Coats, an extension economist for the University of Arkansas Division of Agriculture, predicts the decline isn’t finished.
“Light crude oil prices have had an explosive price run-up since their January 2007 low of $50 per barrel,” he said. “By the beginning of 2008, oil prices had doubled to $100 per barrel, and by mid-July, oil prices had peaked above $145 dollars per barrel. Since then, light crude oil prices have been drifting downward, right on past $100 a barrel.”
What’s causing the fall in oil prices?
“The decline started as a normal correction and now the financial crisis has created a major crisis on Wall Street,” Coats said. “This has further weakened oil prices due to the uncertainty about maintaining global economic momentum and this uncertainty raises questions about future global oil demand.”
Oil market participants are in a wait-and-see mode. “They are simply studying the global economic landscape to determine the impact of today’s financial crisis on global demand for oil,” he said.
Oil prices have been fueled by the global economy’s massive expansion since 2002 and its expanding appetite or demand for energy.
The U.S. and global economy face challenges in dealing with today’s financial crisis.
“The financial crisis will be contained and managed,” he said. “The demand for oil will continue to expand only a little more slowly at least over the next couple of years as the world works through the current global weakness.
“With the hurricane and tropical storm damage being less than could have been experienced, I would expect consumers to see continued gas price relief at the pump,” Coats said.
He said he doesn’t know how low prices will drop or for how long, but the current trend is down possibly through the end of the year or longer. Given the depth of the corrective action in oil prices a $20 per barrel bounce should come as no surprise, that is until prices say otherwise, he said.
“We could still have another major hurricane emerge in the near future that would do major damage to Gulf oil or gas rigs or infrastructure such as coastal refineries,” he said. “An array of global events could cause oil prices to turn and start strengthening.”
Coats said the current global economic weakness will probably be countered with major financial stimulus, “so I believe global economic momentum will be maintained.”
He believes, even with the current economic uncertainty, the global demand for oil will be sustained and grow at a minimum of 1 percent per year. In a world that consumes more than 83 million barrels of oil per day, he said, keeping up with energy demand is obviously going to require other energy sources.
“I’m bullish on the global economy even with its financial problems, so I expect a huge growing global demand for energy from petroleum products, to natural gas, electricity, coal, renewable and alternative fuels and nuclear,” he said. “Our U.S. economic future and the world’s economic future depend on ample supplies of reasonably priced energy for all global citizens.”
Coats said there is a huge transfer of wealth from the United States to foreign countries to buy oil.
“It will be in excess of a half trillion dollars this year,” he said. “The time has come to aggressively pursue and expand the mentioned alternatives.”