The Price of Oil is Falling and the Oil Patch Drums Are Beating

Remarkably, for those inured to peak oil and all the oil patch blather of the last few years, there has been a dramatic retrenchment of oil prices these past few weeks. From a high of $78.40 a barrel on July 14 to $77.30 as recently as August 8, the price has dropped by $8.20/bbl from its high to close at $70.20/bbl on the New York Mercantile Exchange today. That is a dramatic drop. The question now before the market, with its ever growing realization that the prices we have been experiencing are more smoke and mirrors, and more manipulation than reality, is whether this the beginning of the end of the oil bubble?

The oil patch pitchmen tell us the market is simply responding to the stabilization of the political situation in the Middle East (as though Iran is no longer an issue), the slowing economy, and whatever reasonable sounding rationalization that they can come up with. But you will not be reading nor hearing the observation that prices should not have been at the levels we have seen to date. That the market has been contrived, aided and abetted by oil patch cheerleaders such as the likes of Matt Simmons author of "Twilight in the Dessert..." who had predicted $150/bbl oil by the end of last winter (see "OPEC Agonistes" 1/29/06). By the people at Goldman Sachs who were plugging $105/bbl oil based on their projected assessment of oil production capacities and market demand, all the while speculating with virtual barrels (barrels traded on the futures exchanges as opposed to wet barrels, the kind that people actually use) in the futures markets and arbitraging positions pushing prices ever higher. All cheerleaders for the oil patch and its ravenous drive for ever greater profits, all at our expense.

This all may be a temporary pull back. I don't think so. As posted on this site consumers, even our Congress (see "The Enron Loophole Helps OPEC Serve Up a Hefty Helping of Oil Price Baloney", 7.20.06) are getting wise to the Ponzi scheme to which we are being subjected. The bubble of phony shortages, scary peak oil scenarios, leaping consumption forecasts is beginning to sound stale and not very real when we look at inventories of oil and related products, storage capacity bulging at the seams, new production capabilities, declining monthly consumption in China, diminishing price elasticity and on.

Already we are hearing the inevitable and cautionary oil patch voices warning us of the danger of low oil prices. I need only quote Sadad Husseini, a former top executive at the Saudi state oil company, Aramco: "A major drop in oil prices in the next year or two would cause severe disruptions and volatility in the energy industry. In the longer term this can only slow future supplies and damage the global economy." As though $70+ oil would not damage the global economy and continue to destabilize the rational conduct of too many oil exporting nations in their domestic and international affairs.

It is interesting to note that according to Reuters the major oil companies remain cautious in their investment decisions pricing new projects on the basis of $25 oil. Does the oil patch know something they are not telling Us??

A further cautionary note. Please, please, do not invest or make investment decisions based on my comments and observations. That is not the purpose of this exercise. Let's just sit back and watch what happens as these Titanic (figuratively and literally) forces play out.