The Bursting Oil Bubble - Aftermath

The Oil bubble has more or less burst for now as expected. with the price of crude down to nearly $94 from the peak of $147 in July. The main reason for the decline is that the US Dollar is once again stronger than earlier. Since Crude is priced in dollars, any fall in dollar value will increase the dollar price of crude and vice versa. Oil is one of the main commodities that is also used as hedge against the dollar, and now that the dollar is doing good, Oil is getting dumped in favor of US Treasuries and the like. The price of Oil is expected to drop further, since the Lehman bankruptcy will possibly unwind some Oil trades.

The global economic downturn is also playing its part, by reducing the demand for Oil. The last time the world economy was down after the 1997 East Asian crisis etc, Oil fell to under $10 a barrel. The cracks in the OPEC are once again out in the open, with Saudi Arabia not wanting to reduce its production. Politically also, the fall in Oil price is significant with the tide turning away from the Oil producers - especially the politically active ones like Russia.

The presumed demand from rising economies like India and China causing a global upward price spiral proved to be unfounded at least in the short run. And it also showed that however inelastic the price demand curve of oil is, there is still a curve there which causes unrealistic prices to throttle demand. Airlines can once again breathe easily.

Now-a-days, none of the bad news is really affecting the crude price slide very much. News such as Hurricane Ike likely to impede Oil production in the Gulf of Mexico, increased terrorist activity in Nigeria or likewise, which would have caused massive rallies earlier, are causing no more than a whimper, and the price slide stops temporarily before resuming its journey down to a more realistic value.

On the negative side, the push for alternatives to oil is once again reducing, indicating the short sighted nature of the public. Also the reduction of premium on Oil, removes the financial incentive for private investors to pursue alternative renewable fuels. Oil has also stopped being a major campaign issue. This is high time the coming Govt in Washington takes a stand and pumps money into the research for alternative fuels, instead of bailing out companies like the Detroit Big Three to prop up the economy in the short run.

The dent made by the spike of oil prices, made the American consumer more aware of the risks of owning a gas guzzler. It will be a while before this harsh lesson is forgot, which is good news.

The American consumers at the Pump still see Oil at more than $4 since Hurricane Ike destroyed the refining capacity on the east coast, resulting in serious Oil shortages. But this is a temporary phenomenon which should pass in a week or so.

I really applaud the Indian govt's decision to NOT reduce the price of Oil at the pump, even though it is the election year. This goes a long way in reducing the oil subsidy to more manageable levels, and will leave the image of India as a good investment destination intact.