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I don't think mankind will ever see $50.00 Oil again. Just won't happen. The only thing, the only way this could possibly happen in my mind? Is that China and India just disappear.
This is what most people will say nowadays. But please, I would have to remind you that we actually just hit $ 50.00 oil in early 2007. Seems like forever isn't it? What has changed since then? What you say is correct. China and India won't disappear. Cheap oil is a thing of the past. Yes. That is correct. But is $ 50 cheap? What has changed since early 2007?
1. Do we consume 50% more oil and drill equally? (And thereby, causing 100% higher price)
2. If we consume equal amount of oil since last year, then do we drill 50% less oil? Don't think so. Perhaps US producer is drilling less oil. But elsewhere, they have been hoarding oil such as Venezuela. In the US, we consume 3-5% less oil than last year (Correct me about this statistics). And while China is growing, our energy need is 20 M Barrels/day versus China's 6 M Barrels/day.
3. Interest rate is low. Yes, this create speculation on oil future. But when interest rate can get back to normal, just like housing, oil price will come down.
4. Dollar is down. Yes the greenback is down since early 2007. This has caused price of oil to spike.
My conclusion is that price of oil is not merely caused by the imbalance of supply and demand. There is some imbalance but the 100% price swing of oil is not caused by that. In fact, I would say that it is mainly created by: 1) Low interest rate, 2) Devaluation of Dollars, 3) Speculation
Just a note regarding speculation. Similar with any other types of speculations, stocks, houses, grain (100% rise in 3 months. do we run out of rice, everyone? Heck no), and oil, you can leverage your money. 1:2, 1:5, 1:10, in currency 1:20. Thus, do not count this effect out. While speculator is good for the free market, it does cause large swings both ups and downs. Have you ever wondered why some of the dot coms can go up by 2000%? Houses going up 50% a year? Please check the history and see how far they can fall. Yes, the argument is: this time is different. Dotcoms is easily identifiable. They have no profits! But still, those that have profits (eBay, Yahoo with P/E in 100s), they fell down more than 50%. Houses, too can be sold. It is an asset which can be rented. True! But, if price goes up way above rent value, it will go down, just like current situation. How about oil? Yes, oil has its uses. Supply is constraint, demand is down slightly due to high price. But, will it go down to $ 50? That is up to you to decide.
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