Monday, 18 April 2011

Another Oil Bust ?!

Are we heading for another crash ? From June through to August 2008 oil reached a peak level of about $140 per barrel. We are currently at $127 per barrel. Guess what happened after the peak - you can cheat by looking at the graph - it crashed to $30 per barrel.

What basically happened was that all of a sudden everyone realized that oil was too expensive and more and more people reduced their usage, this meant that there was a shock in demand and since all of a sudden demand plunged, so did the prices.

An increase in oil prices affects everyone and by everyone, I actually mean everyone ! This includes people who don't drive cars. Why ? Because increased oil/petroleum prices mean an increase in food prices, an increase petroleum products (i.e. plastic bags/bottles, synthetic clothing, frozen food packaging) prices, an increase in transportation costs, ... People who drive just have another headache.

An example would be for a working person who has to drive to work every day and then takes trips on the weekends. If for example he used to pay an average of $80 a week on filling his car when prices were $60-80 a barrel he would now have to pay an average of $160 a week on filling his car. This means that per month the person has about $300 less to spend. That's massive for the average Joe who only earns $1500-2500 a month. This however is only part of it, since all of his food would have increased in price too.

Of course, what does Joe do ? He decides not to go on his weekend trips anymore and decides to carpool to work with his friends, so instead of spending $300 a week, his spending goes back to its original or less. This, and the same thing happening for every company or person in the world that decide they're paying too much leads to massive plunge in demand, which in turn makes oil prices crash again.

What will happen exactly I don't know, but I don't expect oil prices to go up much past $160 or maybe 170 per barrel, before they crash again. This of course is very speculative of me and I might be totally wrong, but I know I would not want to pay triple prices at the fuel tank every week and I'm pretty sure most people agree with me.

I'm not sure what the effects of another oil bust might be, but I guess we'll see.


  1. The bust in oil prices was due to the global economic crisis, not demand destruction due to high prices. It was an effect, not a cause. The high oil price was a causal factor in the economic crisis, though, although not the most important one.

    I.e., if we see another price crash like that one, it'll be accompanied by another global recession. That's totally possible; if the Eurozone bailout goes wrong and the Euro breaks up, it could easily trigger it. But again, the primary cause for that crisis will be the fiscal mess the Southern European countries have gotten themselves into; high oil prices are just an aggravating factor.

    The current price peak is also largely caused by the instability in the Middle East causing uncertainty about supply. I doubt we'll see a price drop unless and until that instability sorts itself out.

  2. You'd think there would be uncertainty about supply but most OPEC countries are saying there is an oversupply at current prices and Saudi Arabia has even slashed their output due to this. This means demand is already slowing down, while prices are still going up.

    You are probably right this might just be an aggravating factor, but it might become a big one since we're still in the middle of getting back to normal. The EU seems more stable than what most people make it out to be, I think the US isn't though. I think this might be a problem for them.