September 14, 2006
Oil is traded in contracts for future delivery, and companies that take physical delivery of oil are just a small part of total trading. Large pension and commodities funds are the big traders and they're seeking profits. They've sunk $105 billion or more into oil futures in recent years, according to Verleger. Their bets that oil prices would rise in the future bid up the price of oil.$1.15? Holy crap!
That, in turn, led users of oil to create stockpiles as cushions against supply disruptions and even higher future prices. Now inventories of oil are approaching 1990 levels...
...As it stands now, the recent oil-price slump has brought the national average for a gallon of unleaded gasoline down to $2.59, according to the AAA motor club. In the Seattle area, prices per gallon have fallen to $2.856 currently from $3.071 a month ago, a decline of 7 percent, according to AAA.
Should oil traders fear that this downward price spiral will get worse and run for the exits by selling off their futures contracts, Verleger said, it's not unthinkable that oil prices could return to $15 or less a barrel, at least temporarily. That could mean gasoline prices as low as $1.15 per gallon.
Other experts won't guess at a floor price, but they agree that a race to the bottom could break out.
I'm starting to regret pre-paying my home heating oil for the winter. Sigh.
But if gas prices were to fall even as far as $1.50 per gallon, the resulting savings would act like a tax cut and increase discretionary income. On an individual basis, this isn't all that much but multiply the savings by about 150 million drivers across the U.S.
That's a lot of beer money.
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