What is happening to the oil price?

Everyone who drive an automobile is probably wondering what is happening with the oil price. It is always an abstruse issue to debate. Every analyst analyses it in their own way. Let us try to understand what happened with the oil price exactly during last two years.

One fact you can keep in mind always while you are analyzing this commodity is “It is definitely a limited one”. On July 11, 2008 the crude oil price per barrel touched its all time high and stood at 147 US Dollars. The significant reason behind that spike a year ago is increased global demand. Then it came all the way down to $35 per barrel in the mid-February of 2009. Due to earlier spike and taking the global recession into account, the consumption has really decreased during this phase. US have really decreased its consumption from 20 million barrels per day to 17.5 million barrels per day, which is a record low in the past decade.

Again the prices are soaring recently ending up today (19 June 2009) at $72 per barrel which made gasoline to stand at $2.67 per gallon. The recent surge in the oil price is mainly accounted due to the increased demand in the Asian countries China and India. Despite the recession globally, Chinese spending on the automobile industry has increased by 15% last year and expected to rise to 20% this year. The oil consumption in china has almost doubled in the past year and stood at record high of 7.2 million barrels per day. Even the consumption in India is increasing day by day. At the same time OPEC (Organization of petroleum exporting Countries), has kept the production low to increase the prices. Meanwhile, due to the gloomed economy in the US, Dollar is playing weak in the global markets. Since, this commodity is always priced in Dollars, which means one has to buy oil from OPEC by paying US Dollars. The decrease in the value of Dollar against European and other major currencies makes oil cheaper in those countries and hence, the oil consumption is slowly increasing in those countries. Hence, Due to the increase in Demand, decrease in production and also due to weakness of US Dollar, the price of the oil per barrel is surging up again. The other major contributing factor for increase in consumption in some Asian countries like India is the subsidized fuel price offered by the governments, which is completely irresponsible behavior considering both economically and ecologically. Some people explain that the speculations in future commodities are the main reason behind this turmoil in the price of oil, which is not exactly depending on the supply and demand of the oil, which is not sounding really true after looking at all these best fitted reasons.

Beyond this, Oil is a form of inelastic commodity, which means there should be a huge increase in price to see the minute decrease in the demand, which we have observed from the crude price of $147 per barrel a year ago. It is expected that by 2030, most of our oil reserves will be finished, if the demand increases at the same rate as present. Goldman Sachs is confident that the price can be $95 per barrel by the end of 2010 and Deutsch Bank people are confident that the price may go to $100 per barrel by 2015. But the truth is, there may not be slow raises as expected by these banking people, immediate spikes might be inevitable to control the accelerated consumption unless and until the alternative fuels completely take the role of the petroleum. If the promising alternate energy sources didn’t show up to replace oil, it is going to be too expensive to extract oil from deeper layers of earth, which may still need lot of geological personnel approval.

Hemu’s tips to make some bucks:

Considering these issues and keeping track of the global oil consumption levels, demand levels and price of crude oil, one can safely bet on the stocks of oil companies for short term and make huge money. But, if someone is really thinking to invest on oil companies for long term, please be careful…!!

Bottom line:

It may not be a better idea to optimistically dream to get a gallon of gas again for 1.5 US Dollar. You may not see that level again in your life time. If one wants to see the price of gallon at least at this level, start consuming oil responsibly, so that you can buy the gas for the same price at least until the end of your life.