Will Oil Stay Soft?

With expected disruptions so far absent and U.S. consumers cutting down on consumption, some experts think lower prices will stick

For the last few years, being an OPEC oil minister has been one of the world’s easiest jobs. With prices rising and the money rolling in, the ministers might as well have spent their time at the beach. Now, as they gathered on September 11 in the cozy hotels of Vienna for one of their frequent conferences, OPEC oil ministers had something to worry about. After hitting $77 per barrel earlier in the summer, prices have fallen sharply. That drop continued on September 11, when prices fell by another $1.19 per barrel to $65.06.

A temporary softening? Maybe not. Although many oil experts insist high oil prices are here to stay, some respected analysts are making a persuasive case as they call the end of the eight year bull market that drove prices up roughly fivefold since 1998. “The big picture is that the fundamentals are shifting now,” says Eric Chaney, Chief European Economist of Morgan Stanley, “We were very close to $80 in July, and that was the peak.”

Chaney thinks high oil prices are at last having an impact on consumption in the U.S. and Europe, the capital intensive economies, as drivers leave their gas guzzlers in their garage and companies switch to more energy efficient operations. “In the U.S., energy consumption per unit of real GDP has declined faster in 2005 and 2006 than in previous years, a pattern similar to the post 1979-80 oil price shock,” he writes in a recent study with U.S. counterpart Richard Berner.

Business Week