Yes, Oil Prices Can Actually Go Down

Some Anecdotal Evidence That Projected Lower Oil Prices

There is some relief out there that yes, oil prices can actually go down! While it's really the prices at the pump that matter to the consumer, the recent drop has been a welcome sign. Are we going to see very low prices in the future? Two bucks a gallon? No, that's probably a fantasy. Global demand is still strong even if it has 'lessened' here in the US. But, we're in the summertime - high demand for driving. So, why now have oil prices suddenly dropped... and continue dropping?

The Old Peter Lynch Principle

We generally have our systems in place to find the best trades, but often times we need to use common sense to rationally think out of the box about things. Peter Lynch, former Manager of Fidelity Magellan would look at companies and figure if it would be a useful product or service for him to use. If yes, he would buy the company. This is a great way to use smarts to evaluate good trades and investments to jump on ideas that turn into big trends.

I mention this, because a month ago I noticed a trend in gas prices, very subtle. The station down the street lowered gas prices two cents on July 6 - three days after oil had peaked at 146! Why did they lower prices? Perhaps oversupply, perhaps less demand that holiday weekend. Whatever the reason, it happened. I noted it and have watched oil prices (and gas prices) drop ever since.

Countries May See the Oil Top

It hasn't only been OPEC nations that have benefitted from the higher oil prices. Other non-OPEC nations have made gobs of cash from their drilling and delivery. One such country is Mexico, our neighbor to the south. Given their vast reserves, they have been riding the coattails of strong demand and short supply for years now. However, they may have seen the top and are trying to lock in today's prices. Some unconfirmed stories about a country (likely Mexico) that was selling oil futures a few weeks back.

Why is this done? If you lock in today's prices for future delivery and prices fall, you benefit by getting paid today for tomorrow's deliveries. It's clearly bearish for prices as the future supply is known (they will have to deliver the product in the future), especially if buyers of these contracts are nowhere to be found. It's quite possible that more countries will do this as well if prices continue to fall, locking in higher crude if they have the goods to deliver.

Tax Your Way to Lower Demand

We heard from China a couple months back that they would be 'taxing' their citizens for gasoline usage, or perhaps just removing a subsidy (works the same). Why is this significant? If you are paying substantially more for gas, you'll use less of it. It's no secret China's demand for oil is insatiable. The desire for the western lifestyle includes heavy car and truck usage. But, perhaps the government of China is trying to control the demand, hence bringing down oil prices. Many people blame speculators for the rise in oil, but I suspect it's a traditional demand/supply problem. This 'tax' on demand will slow down the demand, but it may only be a temporary solution.

Disclosure: None

Comments

[Ishortyou:]

we are tired of dark age fossil fuel usage, we gonna use new age technologies in electrical and hydrogen-water techs.

2008 Aug 07 08:03 AM

[freefall51:]

I am going to install a propeller on the back of my truck that drives my car. The stronger the wind blows the faster the propeller will spin and the car will just zoom along. Or does it? May be only backwards? Oh, then I got to install the steering wheel and the headlamps on the backside of the car? Idea, anyone?

2008 Aug 07 08:48 AM

[MiningOilGa...:]

Sadly oil is here to stay, and we will probably have to deal with higher oil prices, not lower. Hopefully when the new administration comes in to power, things will change.

2008 Aug 07 09:42 AM

[CLH:]

Yes oil is coming down and no the gov can never help. The answer is from private enterprise which works. All governments are failures except at sucking our blood (taxing).

2008 Aug 07 12:24 PM

[jjason:]

Folks, GO TO;

www.stopoilspeculation.../

And sign the petition.

Someone recently wrote on Seekingalpha that the price of a barrel of oil had doubled in the past 12 months BUT THE DEMAND FOR OIL DID NOT DOUBLE.

Get the speculators out of the futures markets and oil and food prices will come down.

2008 Aug 08 08:22 AM

[mkreisel:]

Without the government, the robber barons would long have sucked your blood dry.

That being said, a healthy balance of power between the business, the labor, and the government is needed because none of them can be really trusted.

2008 Aug 08 02:48 PM