Falling Gas Prices

Oil prices this week have dropped to their lowest levels in five months. Gas prices, finally, have also dropped significantly in recent days. There are a number of reasons why the prices have dropped, and unfortunately most of them are not permanent. So I think any celebrations of the new low oil prices (with “low” being three times what they were only a few years ago, of course) will be short lived.

Oil prices over the past few months have included a built-in “hurricane buffer”. Many people expected at least one or two storms that might damage oil supplies. Since we’ve thus far escaped any serious hurricanes in the 2006 season, people are starting to relax. We may make it out of the year safely, but that doesn’t mean that the devastation we saw in 2005 won’t return in 2007 or 2008. This is a lucky break, not a permanent change, and one year is only a blip in terms of climate cycles.
Open warfare in the Middle East has taken a breather and dropped from newspaper front pages. For now. But it’s worth nothing that the recent Lebanon-Israel war solved nothing, and inflamed anger and hatred that had been merely simmering on the back burner. There are dozens of plausible scenarios that could launch things back into chaos at the drop of a hat.
Higher oil prices are making it more feasible for oil companies to invest in retrieving oil from less convenient oil fields, and some of this investment is paying off in the short term. A recent find in the Gulf of Mexico made huge headlines, especially when it was predicted to “increase US domestic oil supplies by 50%”. The reality of this particular find is, however, that it will produce about 6,000 barrels of oil per day. This sounds like a lot until you realize that the US currently consumes over 20 million barrels of oil a day and growing. Only about one quarter of that comes from the US. “Ultra deep” oil wells like this one are also more expensive to build and operate, so the barrels-in to barrels-out ratio will be poor: each barrel extracted from that field will require using a lot of oil, too
This is a low demand season for oil. Labor Day weekend is over. The “summer motoring” vacation season has ended, and the winter heating season has not yet begun. We’re in a slight demand lull.
Oil suppliers have been trying to crank up production for a while now, and it’s beginning to take effect. Even with dropping prices, they are being encouraged to keep production high. The reality of this, of course, is that we’re just pumping the remaining oil we do have out of the ground faster. This practice will lower prices in the short term, but make for a harsher crunch down the line.

At any rate, even the recent high oil prices haven’t slowed our oil-based economy. Canadian car sales last month boomed, surprising nearly everyone with the best August in history. Companies are flocking away from downtown Toronto to build in the suburbs where land is cheaper and the car rules.

I guess there will be no soft landing.



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