IMO, the "free market", offers no long term solution to the petroleum price cycle problem. You've seen what has happened to demand for housing, how declining demand has affected house price levels. Declining house prices have caused lending standards to tighten, as more borrowers default on their obligation to make loan payments.
Commercial, consumer, and mortgage loans are available to fewer borrowers, as numbers of qualified buyers, under new, tighter lending rules, lessen, affecting overall demand for a wide variety of products and services.
What is happening to housing valuations, is creeping into the broader economy. Demand is driven by borrowed money. When there is less ability to borrow...there is not a shortage of funds available to borrow, there is a climate now that heavily favors the restriction of lending to only those who are so sound financially, that either don't need or are not interested in borrowing.
This is a consequence of the pessimism of lenders, and it infuences a decline in consumer confidence. In the late 1970's, it became the norm, with prices generally rising 12 percent annually, to buy now, before prices rise further.
With housing, and increasingly, with most other discretionary items, the consumer will defer purchases as prices are falling, or be unable or uninterested in borrowing funds (credit card purchases, home equity loans...). A "wait and see" attitude develops amongst potential buyers.
Against this backdrop, I expect that the Fed is losing it's battle against it's actual greatest concern, a severe, deflationary downturn.
http://www.marketoracle.co.uk/Article4657.html .
I predict $2.00 per gallon gasoline, by March, 2010, because of declining worldwide demand, so I see no need to consider rationing. Cash always is king when it is difficult to borrow. The value of even weak currencies like the US dollar will rise in value in these conditions, as more people prefer to hold their money, not spending or lending it while they "wait and see", all over the world.
The "free market", will crush investment in alterantive energy projects, as it has since 1981, and most recently, when crude oil briefly dropped below $15 per bbl., less than 9 years ago. Unless the US government does what has been practiced in Europe for more than 30 years, tax petroleum products to maintain a "floor" level that permanently encourages conservation and investment, we in the US will be prisoners of petroleum. The wise course would be to fix a price for fuel at current levels, via a new federal tax. Half of our $800 billion annual trade deficit is from importing so much petroleum.
Quote:
http://www.washingtonpost.com/wp-dyn...0300244_2.html
Tempted by Oil's Surge, Investors May Overlook the Downside
Experts See the Appeal but Warn of the Market's Volatility
By Tim Paradis
Associated Press
Sunday, May 4, 2008; Page F07
....But new Energy Department data show that demand for finished petroleum products fell 8.5 percent in February from January and that demand for gasoline declined by 6.2 percent.
Kelly noted that oil use isn't surging, though it is expected to increase in coming years, with the economic rise of countries like China and India.
"One of the things I think is very important to realize is that the growth in world oil consumption is not that strong. In fact, if you look over the last two years, world oil demand in total barrels has only gone up by about 1 percent per year," Kelly said.
"There is a genuine shortage, in the long run, of oil, but the prices that we're seeing right now are prices that should have cleared the market in five, 10 years from now, not today," he said.
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Quote:
http://www.atimes.com/atimes/Global_.../JE24Dj02.html
May 24, 2008
Page 1 of 2
Oil price mocks fuel realities
By F William Engdahl
.....The US government's Energy Information Administration (EIA) concluded in its most recent monthly Short Term Energy Outlook report that US oil demand is expected to decline by 190,000 barrels per day (b/d) this year. That is mainly owing to the deepening economic recession.
Chinese consumption, the EIA says, far from exploding, is expected to increase this year by only 400,000 barrels a day. That is hardly the "surging oil demand" blamed on China in the media. Last year, China imported 3.2 million barrels per day, and its estimated usage was around 7 million b/d total. The US, by contrast, consumes around 20.7 million b/d.
That means the key oil-consuming nation, the US, is experiencing a significant drop in demand. China, which consumes only a third of the oil the US does, will see a minor rise in import demand compared with the total daily world oil output of some 84 million barrels, less than half of one percent of total demand.
OPEC has its 2008 global oil demand growth forecast unchanged at 1.2 million barrels per day (mm bpd), as slowing economic growth in the industrialized world is offset by slightly growing consumption in developing nations. OPEC predicts that global oil demand in 2008 will average 87 million bpd, largely unchanged from its previous estimate. Demand from China, the Middle East, India and Latin America is forecast to be stronger, but the European Union and North American demand will be lower.
So the world's largest oil consumer faces a sharp decline in consumption, a decline that will worsen as the housing and related economic effects of the US securitization crisis in finance de-leverages. The price in normal open or transparent markets should presumably be falling not rising. No supply crisis justifies the way the world's oil is being priced today.
Big new oil fields coming online
Not only is there no supply crisis to justify such a price bubble. There are several giant new oil fields due to begin production over the course of 2008 to further add to supply.
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