Speculators Get Theirs, Thanks to YOU!

Ok, so maybe oil was up a little today, but it is still under $125 a barrel. As of a couple weeks ago, it seemed like the sky was the limit. Oil neared $150 in intraday trading, and was closing in the mid $145s.

Remember just a mere couple months before, early May, Goldman Sachs analyst and oil pricing guru, Arjun Murti, predicted oil at $200 a barrel within the next couple years. That sent prices skyrocketing to $123 a barrel, which until the last couple weeks, seemed like it would be the new floor. So why, in the middle of the summer, why are prices headed south? I'd answer that with the same 3 words I use to answer any pricing question: Supply & Demand... DUH! (guess that's 4).

Mr. Murti, in his research note, wisely foresaw "that prices would ultimately force demand to fall sharply." According to the Federal Highway Administration, Mr. Murti wasn't predicting the future, but the present. Even in May, Americans drove 9.6 BILLION miles fewer than they did in May the year before... That's an additional 9.6 Billion to the "40.5 billion miles less [in the first four months] compared with the same period in 2007".

Now, I'm not one to go making up stats, but let's do a little math. I'm going to take a quick guess and say the average vehicle on the road gets 20 mpgs. Just quick and dirty, this means a reduction through May 2008 of approximately 2.5 billion gallons of gas (50 B miles/20 Mpg)-- At $4 a gallon, that's $10 billion saved -- Nice Job!

Furthermore, Americans made these cuts when gas hadn't yet reached those peaks it found in July. It would be reasonable to conclude that higher prices may have lowered demand even more, potentially causing prices finally to start falling, and may result in sending speculators running for the hills. I'm not saying we'll see $50 a barrel again anytime soon (or even $100), but to hitting $200 is going to be pretty tough with consumers actually changing their habits.

You've got to love how fast supply & demand works. Prices got high and people stopped driving, brilliant! And as an added benefit, my drive to the beach 2 weekends ago set a new time record for the summer... in a Prius, of course.