High Oil Prices: The Truth About A Misguided Witch Hunt

Supply and demand still run the economics of oil

     

What Really Controls Oil Prices

It doesn’t matter whether it’s French fries, hog bellies, wheat, or oil…sometimes there’s simply too much supply and prices fall no matter who’s “long” or expecting prices to rise.

At other times demand plummets and those who want to sell simply have to lower their prices to the point where buyers step in. That’s what is happening now.

Why really doesn’t matter. But if you must attribute a reason for the move lower, try this on for size. The threat of a eurozone blowup has got traders pouring into U.S. dollars in a classic flight to safety.

Oil is priced in dollars. So as the dollar rises, oil prices generally fall.

No doubt there are others, too. For instance, the threat of open warfare in Iran seems to be diminishing as is the risk of supply disruptions in Russian and South American fields. That’s helping deflate the so-called risk premium.

But have no fear, higher prices will return. It’s only a matter of time.

Given the way our world works, there are bound to be more buyers than sellers as global demand rises over time. Don’t let anybody tell you otherwise.

To that point, global demand is forecast to increase wildly in the next decade. One study projects a 25% increase in demand to 105 million barrels a day by 2015.

That’s up from roughly 89 million barrels a day now as noted in Oil and Gas: A Global Outlook by Global Industry Analysts, Inc. and up from the 84 million barrels used as a basis for the projection.

Other estimates vary but every serious study I’ve seen suggests an increase in demand. It’s only logical that prices will follow.

In the meantime, it’s better not to buy the dips. Sell the rips instead.

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