Oil prices have dropped 55 percent from their peak in July and they could go lower. That’s what you want, isn’t it? Cheaper gas and cheaper heating fuel allows you to spend more on things you really need – like your kids’ education or appliances.

Oil cost over $147 just three months ago. Now it is under $70. How low can oil go? How low should you want oil to go?

It should go much lower but don’t be too quick to rejoice. If prices fall further, the vast oil sands of Canada would become uneconomical. The tens of billions of barrels of oil lying under the deep waters of Brazil and elsewhere would cost too much to produce.

Oil first went down on weakening demand in the U.S. Then when it became apparent that de-coupling was a load of crap and our economic problems had spread to Europe, oil went down even more. Those were the first two legs. We have one more major leg to go.

Oil should fall another $10-20 per barrel as the global slowdown infects the fastest growing countries in the world. Those are countries in the developing world – countries like China, India, Brazil and Argentina. They’ve just begun to grapple with much slower economic growth.

In response oil producers are cutting back production. When they met last week in Vienna in an emergency session, they decided to cut back crude output by 1.5 million barrels per day. But I doubt that OPEC can put a floor under the price of oil. They failed to do it in the 1990’s. Too many OPEC countries didn’t like the idea of seeing shrinking revenues go down even further from lower production.

Will it be different this time around? Venezuela is a big spender. So is Iran. And then you have non-OPEC countries like Russia that are desperate to put more cash in their coffers. How long can they play this game? A few months won’t be a problem. But the global economic crisis will last longer than a few months … at which point we’re sure to start seeing cracks in OPEC’s united front.

Ten dollars a barrel? Sounds good. But it would not only signify an ineffectual oil cartel. It would also mean that the world is in a long and deep recession. And it would be setting up the biggest oil shortage yet once economies start turning around.

Call me crazy but I like where the price of oil is right now. In this case lower isn’t better.

Source: The Next Great Oil Shortage Begins Now

Last 5 posts by Andrew Gordon

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