Why Oil Prices Aren’t Going Down
I saw a humorous story a few days ago:
The price of a barrel of oil would be closer to $10 if the commodity wasn’t traded as an investment instrument, given the record-high levels of U.S. oil inventories, Peter Beutel, president of Cameron Hanover, told CNBC Monday.
“I honestly think that if there were no investors using oil as an asset that the price of oil right now would be $10 or $15 or $18, but it wouldn’t be anywhere near where it is,” Beutel said.
First off, the cost of production for most producers is significantly higher than that. The easy, cheap oil is gone. That’s why we are drilling a mile deep for oil in the Gulf of Mexico. But the other reason that oil prices aren’t going down soon is because demand has been recovering. Courtesy of the EIA:
That shows that petroleum demand has been steadily climbing for a year, and has recovered to levels last seen two years ago.
This one shows a similar story for imports, albeit with an even steeper rate of increase:
It is hard to imagine oil prices softening with demand again rising, much less trading at $10/bbl. This is why I am not optimistic for an imminent recovery from the recession. Oil prices are at $75, and demand is rising. And we know what happens to oil prices as demand continues to climb…