Tmalan

What's the Right Price for Oil?

There is also the variable as how much the cost of oil goes into inflation by companies that transfer the extra cost into the products and services. Dow Chemical is good example of this.

So, it can be argued that oil is trying to find a "true value" in the marketplace. This would be a price that did not transfer a large amount into inflation and created demand destruction without it being so drastic.

There are many handicaps with oil finding it's true value since countries like China subsidies and how slow companies are to increase prices due to raw inventory costs. So anytime you have a quick run up in oil price, the true effect is buffered and slowed. It would be better if the price of oil gradually increased over time so as to be able to better see the effect of the price increase.

Also, inventories of oil thinning out would be an effect of over value. You would not keep the normal amount of inventory of anything if you felt the price was to high and would come down fairly quickly. This would be like filling your gas tank up full and then the next day the price at the pump drops 5 or 10 cents. I do not know about you, but since oil has been dropping back, I have only been putting about 5 gallons at a time in my tank instead of filling it up.