We've seen incredible swings in the price of oil and gasoline over the past year. Oil reached nearly $150 per barrel and gasoline exceeded $4 per gallon last summer and now they are below $40 and $1.50, respectively. Experts agree that the upswing was not completely due to an increase in demand or decrease in supply, but also due to speculative trading by oil traders who were taking advantage of what some would call imperfections in the market to drive the price up and profit from it while doing so. But is the global economic crisis and resulting decrease in demand at the core of the precipitous drop in oil and gasoline prices? Surely it's a factor. Is it the only factor or even the major factor?
We've seen drops before. After rapid increases in the price of oil the world gets busy developing alternative fuels to gasoline and oil and more efficient cars. OPEC sees that as a threat to the demand for their product. OPEC then steps in and cuts prices by increasing supply. The result is that the drive for more efficient cars and cheaper alternatives to fossil fuels wanes and the mainly Arab nations that supply the world with energy can sleep better at night, knowing that billions of U.S. dollars will continue to flow into their coffers thus funding the lavish lifestyles of their rulers and oil barons, and, to an unknown extent, funding terrorism as well.
With Barack Obama coming into the White House soon OPEC is once again nervous about the increased activity in developing alternative sources of energy that might decrease the demand, and therefore the price, for their product. Another Republican administration in Washington would have been content to continue to invest in an oil-based infrastructure, even if more of the oil for the world's largest consumer of that oil, the U.S., would have come from within its own borders. (Remember "Drill, baby, drill!"-?) It is clear that the drive to get away from the depleting resource that oil is, is much stronger now that Obama is about to set up residence on Pennsylvania Avenue. And so, OPEC waves their magic wand and prices drop.
It will be interesting to see how long prices at the pump stay below $2 per gallon. (I paid $1.37 the other day.) Just as interesting will be how gasoline prices and the level of investment in alternative energy sources move together, or not, as they have in past.