Oil Trends Blog

Several months ago Oil Trends Blog addressed the rapidly rising cost of crude oil. That blog is titled “The Great Oil Shortage Myth“. The conclusions drawn in this discussion were (a) there was no shortage of oil and (b) the increase in the price of oil was not a supply and demand issue, but, was rather the work of greedy speculators operating through the Mercantile Exchange in New York.

With the recent drop in the price of crude oil, it seems appropriate to again review the supply and demand issues affecting the U.S. oil situation. The following graph illustrates the recent decline in crude oil prices.

As you can see crude prices increased about 100% from May 2007 to August 2008. Since August of this year, however, the price has nearly dropped 100%. This rapid decline has resulted in crude oil prices reaching levels that most economists believe represent the true value of the commodity. The driving force behind this rapid decline, if you are to believe the media and so-called oil experts, is the drop in demand for crude oil. We are expected to believe that U.S. stocks (inventory) of crude oil have risen so significantly in the past 2-3 months that the price of the commodity has dropped 100%. While it is true that U.S. consumers have cut back on their driving this in no way accounts for such a radical change in oil prices.

If you look at the following graph you will see that crude oil stocks have remained relatively constant over the past year and are in the middle of the average range expected.

The increase in stocks from August 2008 to present is not unexpected. There has been some conservation exhibited by the public due to the higher prices and we are also out of the summer driving season. However, the rather small increase in U.S. stocks of crude oil can not explain the rapid drop in price. As we have pointed out in the earlier blog mentioned above, supply and demand is not the issue. There are ample supplies of crude oil. The rapid change in price, both up and down, is the direct result of speculation.

The price increase from May 2007 to August 2008 caught the attention of congress and there was considerable discussion about identifying the major speculators and placing restrictions on their activities. It is no wonder that the major players in the speculation game decided to cool their aggressiveness. In our opinion the recent drop in crude oil price is due in large part to a retrenching of speculator activity. Hopefully the crude oil price will remain at a level more consistent with supply and demand issues from this point forward.

All graphs were from the Energy Information Administration.