October 11th, 2005 by Hafiz Noor Shams
How high will price be before consumers cut back demand for crude oil? I asked the same question more than a year ago.
It seems that USD70 per barrel is the price. My gut tells me that the prices which demand turned direction is lower due to lag. Probably in the range of USD60 to USD70 per barrel. Even before that, SUV sales had decreased tremendously.
Crude oil prices at the New York Mercantile Exchange for November delivery hover around USD62 per barrel while November Brent lingers at USD59 per barrel. The fall in crude prices started during early September after prices reached USD70 per barrel in last August. The fall is happening in spite of production capacity loss due to Hurricance Katrina.
So, are we going to see continuing fall in prices?
The looming winter in the US and Europe is expected to be colder than usual. Unless prices could cushion its rise during the upcoming winter, I don’t expect this price decrease would continue unabated.
But some innovations might help reduce demand of crude oil just like what happened during oil crisis in the 70s. Malaysia is planning to mix biofuel with gas while hydrid vehicles are hot in the US. Still, we may only know for certain where we are when the northern winter ends in April next year (May for People’s Republic of Ann Arbor).
Whatever it is, a falling demand is a bad thing for OPEC. They do have the incentive to increase production to lower prices a bit. The last time crude oil prices broke some records, oil became really cheap for about two decades because fuel consumption efficiency was forced to increase.
p/s – wow! Deja vu!