WHY OIL WILL FALL

I’m not going to write about how some analysts have predicted that the US is headed for depression, because to me that is a complete farce. I have to admit, sometimes they’re very convincing. In fact, I’d be a believer by now if it weren’t for one simple fact; I’ve read the same gloomy predictions by the same people over the past fifteen years.

In short, don’t you worry, the economy will be fine in the end; no depression is coming but the road will be bumpy.

The price of Oil is ridiculous. Imagine I told you in the summer of 2007 that we were going to see $150 per barrel in one year. You would have written me off as a quack, and for good reason. There is absolutely no reason why oil should be worth what it is today (fundamentally that is). Nothing has changed between this year and last regarding supply. In fact, there are more and more reserves being found this year than there were last. So maybe it’s demand? Not likely.

The speculators have taken the price of oil so high that it’s now creating an economic crisis. This has set up oil for an imminent drop in value.

Here’s why:

What will happen when those with lower incomes can’t afford to take themselves to and from work, to pickup the kids, or go to the grocery store?

Demand will fall. Those with lower incomes are already in a situation where the price of gas is too high to continue living the same lifestyle. It is difficult to afford to work far from home anymore and many people now face the sole option of public transit.

The average lower income individual in the US makes $12,000.00 to $15,000 annually. If this individual is commuting to and from work daily, with an average of 30 miles round trip they are likely filling their tank up on a weekly basis. If they are fortunate enough to have a fuel friendly car, which many do not, they might be lucky to pay $50 per week in gas as long as they only use the car for the essentials. That would put them at $200.00 - $225.00 per month in gas expenses. Annually that is around $2,700.00. Sure doesn’t leave much money for living does it?

I think your getting my point here.

The price of oil is increasing so dramatically, so quickly that this crisis will soon affect the lower middle class, if it hasn’t already. What happens when they stop driving?

Demand will slow down for oil even further. Sentiment surrounding the price of oil will change. Fewer and fewer speculators will believe the high price will hold steady and we will see a sharp decrease in value.

This oil bull-run is going up on a lot of hot air and won’t last. Expect $100.00 per barrel in the not so distant future.

Aaron

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