Oil Races Back Toward $65

The Gulf oil leak and Hurricane Alex are not moving up crude prices.  In fact, the price of oil is back below $75 .Oil dropped into the $65 range last September as demand slackened and refinery usage slowed. The global economic recovery sent crude well over $85 and it touched $90 in April. That was  a year-over-year price increase of 38%.The evidence that global GDP will be well below World Bank and IMF forecasts is growing. China manufacturing is moving toward a contraction. Unemployment in the developed world is still high and governments have put an end to stimulus packages mostly for political reasons. A number of economists say that growth in the West is not self-sustaining. That means without government aid, some of these nations may lapse  back into a recession.

Crude demand in China, which has had a voracious appetite for oil, is likely to fall off. The same thing has probably already happened in the US and Europe. The number of miles driven by consumers usually drops during a recession. So does the demand for petrochemicals.

It is easy to forget that the amount of oil that comes from the Gulf is very modest compared to world production. OPEC says it will keep demand at current levels. Nations such as Russia, Canada, and Norway are still net exporters of large amounts of oil. Their national economies depend on these exports.

The odds are increasing that oil will move back to where it traded during the most difficult periods of the recession. Most of the economic indicators point that way. Ironically, low oil prices help the economy. It will need all the aid it can get.

Douglas A. McIntyre