Thursday, October 23, 2008

Gas prices

The Arco station's down to $3.09/gallon today. That's a 20-cent drop in a week. Pretty steep there.

I don't think the threatened OPEC production cuts will reverse the decline either. Gasoline demand in the US is down 6.4% over a year ago, and world-wide it's slowing as well. Inventory levels are rising, indicating supply currently exceeds demand. OPEC's dream of $100+/barrel oil is just that, a dream. The world right now can't afford that price, and at that level it becomes economically viable to use alternatives. And quite frankly that price level was never set by market forces, it was set purely by speculators who're currently in the process of losing their shirts, pants, socks and underwear and absent another speculation bubble prices aren't going to go that high again for quite a while. The only way OPEC could drive prices that high again is to curtail production so severely (say in the 25% range) their members wouldn't honor the cuts. Prices went too high too fast and stayed there for too long, people have changed their behavior (abandoning SUVs for smaller more fuel-efficient cars, finding ways to not drive, etc.) and even as gas and oil prices fall the housing implosion and credit crunch are sending the economy into the toilet making people twitchy about spending money and keeping them from returning to previous expensive habits. It's going to take years for natural growth to offset the effects of those changes. Sorry, oil guys, but in your quest for a short-term windfall you screwed your profits over the long term.

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