ANTIESTABLISHMENTARIAN

It was the speculators, right? They broke the back of the evil speculators. Nope, that’s not it. Two fundamental factors suddenly combined to spark the drop. First there was a drop in demand followed by an increase in supply. The drop in demand or consumption occurred almost entirely in the US in the first 5 months of this year. The decline is 757,000 b/d over same period last year or 3.5%.

I’ll admit that I was blindsided by the increase. But that’s what happens when you’re not an insider. One has to work with whatever data is at hand, the accuracy of which is always debatable. Ah, well, at least I wasn’t as far off as the overpaid pros at Goldman Sachs who were predicting oil at $250 this year. I’ll take a little bit of solace that as an amateur I beat most of the pros.

Many have asserted that May 2005 was the year of peak oil. That proved not to be the case as oil production rose by 580,000 b/d in the April/May period. Further, production of condensates and natural gas liquids increased 310,000 b//d for a total liquids increase of 890,000 b/d.

Another lesser factor was an increase in biofuels production this year.

The major part of the increases came not from OPEC but International Oil Companies.

For the uninitiated, condensates and liquids are not crude oil but have many of the properties of oil. You can’t make gasoline or diesel from them, but you can make plastics and other things. Therefore, the capture of these liquids frees up more oil for making fuel. That is, oil that otherwise would be used for things like plastics.

Did the rising value of the dollar have anything to do with it? Sure, whatever percentage increase rise in the dollar would be mirrored by oil price decline. Inflation, as we know, affects the price of everything. Inflation is not rising prices. Rising prices are the EFFECT of an increase in the amount of money created by the Fed and its banks.

Will the price of oil keep going down? I find that unlikely and the last few trading days suggest that it is bottomed out. Fundamentals would suggest that the price has overcompensated and fallen too far by perhaps 20% of the decline. If production remains about the same, my best guess is that the price should level out around $120 until the next supply contraction which is coming soon enough.

Unlike most, I am not cheering this price drop because it gives a lot of people, particularly politicians, false hope. In the Energy Information Agency’s latest report their estimate of of the worldwide rate of oil field depletion was raised from 4.5% to 5.2%. That means that we are using oil at a faster rate than we are finding new oil. World demand is still increasing, down from a 1.5% rate last year to an estimated 1% rate this year, all from the orient.

World production fundamentals are unlikely to maintain the recent increases. Therefore, one should regard the recent price decline as temporary. The ever increasing depletion rates are beginning to kick in hard and there is virtually no hope of bringing on sufficient new discoveries to offset the decline of existing oil fields.

But won’t these very high prices spur greater exploration and production. Yes, it would if there were more new large fields to be found, but there aren’t. The new discoveries just keep getting smaller and smaller while we need more and more. We will soon be at the point where we are bailing out the Titanic with a tea cup.

Besides, with the Russian invasion of Georgia it looks like the oil wars are beginning already. If you want to understand what’s going on in the world, find out where the oil is and then look at a world map.