04 June 2010

Oil prices tumble as spill worsens. Who'd have thought?

Even as oil spouts unceasingly into the gulf of Mexico, in one of the worst spills ever, prices are falling. This is quite a change from the behaviour we've seen in the last several years, where even the hint of an oil spill would cause prices to spike, as investors fretted the loss of precious supplies.

If anything, one would think that the backlash against oil that is being stirred up by this environmental catastrophe would be driving prices through the roof, since all the new tough government regulatory changes are going to greatly restrict new exploration and future supply.

This calls into question the whole hypthesis that it was dwindling supplies which were driving oil prices up in the first place. To all those peak oil adherents out there, I regret to inform you that it is speculation which has been the main force in rising prices in recent years, not a fall in supply. Just look at the vast fleets of tankers being used to store oil on the hope that prices will rise even more.

When you add in the drop in demand that is occuring due to a slowing global economy, there is more than enough potential for oil prices to drop significantly more.

In the 1970s many people thought oil prices would just keep rising forever only to see them crash, and stay suppressed for 20 years. It looks like history may be repeating.

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