Oil Starts Move Down to $20

While some of the forecasts for the fall in oil prices are bogus, others have some merit. Perhaps companies holding crude will find more tankers to keep oil out at sea. No one knows how many tankers that might be, or whether their capacity has been filled.

On the other hand, Russia claims it will hold production at current levels. Venezuela has started to find ways around sanctions that have hurt its oil exports. According to Boston.com, a drop in sanctions against Iran could nearly triple its exports. Fracking in states such as North Dakota has been slowed by lower oil prices, but some experts claim not enough to undermine production by any meaningful degree.

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The most convincing argument about a further drop in oil prices is a decline in China’s appetite. The U.S. Energy Information Administration (EIA) reported a year ago that China had become the world’s largest importer of crude. However, the agency’s prediction that Chinese demand would continue to surge may be undermined by an economy in which gross domestic product improvement has dropped below 7%, based on Organization for Economic Cooperation and Development (OECD) forecasts.

Another strong case for a falloff in demand is that a period of high oil prices has triggered more fuel-efficient use of crude at both the institutional and individual level. The fuel efficiency of automobiles has risen in the United States, the world’s second largest car market. Many of the same models sold in the United States are also sold in Europe. More efficient power plants should also press prices lower.

The problem with oil price predictions is that they may include scores of factors, some of which are flawed. However, if most of the factors that do push oil prices down are correct, then crude prices could continue their present collapse.

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