Oil Demand Down .25%, Price Down 56%. That’s Odd.

Without a doubt, 2008 was a crazy year for oil and gasoline prices.  Not only did both oil and gasoline hit record high prices — $147 per barrel and $4.12 per gallon, respectively — but both also managed to fall to five year lows.

When looking at the year in total, from January 1 to December 31, the price of oil fell from roughly $100 per barrel to roughly $44 per barrel, or about 56 percent.

Obviously, it is pretty abnormal that one of the world’s most valuable natural resources would lose over half of its market value.  The only real and logical explanation behind the drop in price would be an equally dramatic decrease in world wide demand, right?

Well, in this case, wrong.

According to the International Energy Agency, a widely followed and respected adviser to industrialized nations, they predict that worldwide oil demand fell from 86 million barrels per day in 2007 to 85.8 million barrels per day in 2008.  In doing the math, this constitutes a .25% drop in consumption.

In comparing this minute drop in demand against a similar drop in oil prices, we would have seen the price of oil drop a whopping quarter — as in 25 cents — during 2008.

Even when you take into account the strengthening of the dollar — which ended up nearly 10% for the year against many major currencies — it’s still nearly impossible to explain the halving of the price of oil.

So, now it appears the only real explanation behind the rise and fall of the price of oil is speculation.  With many energy analysts predicting a massive jump in world wide demand over the next decade, and with the dollar eroding in value, it certainly seemed like oil was a sure bet for double digit annual returns.

But, thanks to the worst world wide economic crisis since the Great Depression, it seems as if the price of oil is bursting like the housing market and tech stocks before it.

Whether that money was taken out of the commodities markets to help cover margin calls, cover investors pulling money out of hedge funds, or put into U.S. Treasuries (which now appear to be in their own bubble) you can’t the fact that the retreat of speculative investing is likely the single largest factor in the decrease in oil prices.

Comments

  1. My vote is for market manipulation. 😉 Keep the price of oil down, and people won’t realize how much trouble we’re really in.

  2. Lindsay’s right on both counts. This is a great opportunity to balance the budget with $10 a gallon gas taxes and imported oil tariffs. Two can play at that game. While thy’re at it, ban Hedge funds and computerized trading. Put the Ponzi schemers in prison and throw away the key.

    Then, I’d buy a new car. The Mini Cooper D looks good. 74MPG on diesel.

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