IT is not always the case that what goes up must come down but there was a certain inevitability about what is happening to oil prices. At some point, it was accepted, they would fall. They could not continue rising forever although that was the hope of speculators; in fact many in the industry thought that the price might reach $200 a barrel before finally dropping. In the event, it never reached those giddy heights. It is now hovering around $100 a barrel, down almost a third from the record high of $147 a barrel two months ago.
The reasons are as opaque as they were for the rise. Normally, for example, reports of falling crude inventories in the US or hurricanes in the Gulf of Mexico would send prices up. But inventories are reported down in the US and Hurricane Ike has been tearing through the Caribbean; yesterday it was a Category 2 storm and forecasters think it could become a Category 4 as it heads toward Texas, home to a quarter of US refining capacity. A couple of months ago, the combination of the two would have had speculators in an oil price frenzy. Today it is as if nothing is happening. That is because of falling demand and fears of a global recession. It has put off the investors who now have a strengthening dollar to attract them.
The question is: Will the price drop further, or will the 520,00 b/d cut by OPEC members announced a couple of days ago reverse the slide?
Five months ago when the price was at $120 a barrel, OPEC president and Algerian energy minister, Chakib Khelil, was one of those who thought that it would hit $200. Today, he thinks that the production cut will make no difference and is reported as predicting that the price could go as low as $75. This time he may be right. Fears of international recession are not going to go away. The euro is at an all-year low against the strengthening dollar because of concerns about the economic health of the euro zone economy. Energy consumption has been seriously hit, both by high fuel prices and fears of recession. In France, for example, it has fallen 10 percent for two straight months. In the US, demand is below what it was a year ago.
Faced with falling prices and falling demand, OPEC has decided to cut production back to previously set quotas.
The decision is a worrying one for many reasons. First of all, it sends out the message that oil producers want the price as high as possible. That is a bad message. It will convince many in consumer countries that they were right all along, that it was the producers who pushed oil prices through the roof and that they are the real problem.
Secondly, it is bad for the world economy. One of the main reasons demand is falling is because prices were too high. They have helped trigger recession in so many countries. Thirdly, high prices damage the long-term energy market. They have already forced consumers to cut their fuel costs by driving less and reducing their heating or air-conditioning bills or they have pushed them into using alternative technologies. The longer prices remain sky-high, the more consumers will look at alternatives. That is not good for oil producers.
More to the point, oil producers cannot insulate themselves from the global economy. If there is recession elsewhere, it will hit them too. No matter what the price, demand will go down.
Maintaining high prices is also irresponsible. We need to stimulate world economic growth, not strangle it.
Not that high prices are likely to remain. The market view that they will drop at least another $10 seems entirely logical. Unfortunately, what people are going to remember is that the producers want the price to be over $100 a barrel. It would have been far better to leave production levels alone instead of trying to go for a fix that sends out all the wrong signals, is irresponsible and probably does not work anyway.
