The Coming Collapse of Oil Prices

Bold economic predictions are dangerous, and I’ve been wrong before, but here goes: Oil prices are about to tumble.

There are several important reasons to believe that crude oil prices of roughly $130/barrel are simply not sustainable. The first is that world-wide economic growth, and hence the demand for crude oil, has slowed markedly due to the credit crunch and the bursting real estate bubble. The second reason is that the Federal Reserve has finally decided to stop lowering interest rates and/or creating credit as if it were the Tooth Fairy; a stronger dollar will mean lower oil prices. Third, the already record high crude oil and gasoline prices have created strong incentives for consumer and business conservation and that has lowered overall demand.

Yet the most fundamental reason to expect prices to fall is that the gap between the price of crude oil and the cost of producing it is just way, way too large to be sustained long-run.

Lew
Rockwell