Dwight Watt - Watt Thoughts #171 12/18/2008

#171 Oil prices (Watt Thoughts)

Long before the oil prices made their final ascent into the stratosphere last summer at almost $150 per barrel, I had predicted prices would fall and that a more rational price of oil is about $50 per barrel. We heard all during the rise that the world had run out of oil and there was no ability to produce any more.

Now that prices have turned south, in my opinion they are again going overboard in that direction. When you got oil traded as a commodity it became subject to traders having speculation fever up or down. I think the price is more rationally about $50 per barrel or up to about $60.

We have seen OPEC this week announce cuts of 2 million barrels a day production on top of large amounts already cut earlier. And yet price declines, US stockpiles rise and we supposedly were out of oil. Production has increased and more is coming on line world wide (OPEC, Russia and others). Consumption 0of gasoline has fallen as people figured aways to cut back. Some of that will comeback at the cheaper prices and as economies improve, but other is gone. People have started getting more efficient cars and auto makers are doing more, although I keep wondering when I drive a 2001 Saturn that gets 36 mpg and GM keeps writing me to buy a more efficient vehicle and all the list in ad only get up to 32 mpg). People have found they can carpool and use mass transit and now that has become a habit (even if only 5 or 6 months) it is enough to keep most doing more of it. People that added insulation to houses and businesses will not remove it.

Even though price is down we still need to develop more alternatives in America including biofuels, wind, drilling, shale-oil, water, etc. We also still need to build more refineries in America as we are still on the edge there and hurricane season showed. Refineries that are not just on gulf coast but thru out country and clean environmentally. Maybe we should consider mini-refineries as beer ahas started doing with mini-breweries. We also need to develop more pipelines to deliver the energy in redundant lines, so hurricane distribution problems do not occur again.

Hopefully oil will soon stabilize in the $50-$60 range ($70 as OPEC said is their goal would be ok, but I think higher end of what supply and demand should seek) and make managing our economy easier without the peaks and valleys in oil.

As we continue to work to be more energy efficient and ecologically wise, hopefully we can continue to grow our economy as we have already done over the past 40 years while making big improvements in both areas.



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