Reasons Why Oil Prices Should Lower

It appears that we are in a runaway speculative bubble in the price of gasoline. Throughout history, there have been periods where the markets lost touch with reality and began bidding the prices up of something or other for the sole reason that the price was going up. This seems to be one of those times.

The fundamentals aren't there. It is true that we are using oil at nearly 100% of refining capacity, but that fact alone would only justify a price of $50 per barrel or so. At the time of this writing, oil is between $73 and $75 per barrel. There are four reasons that the market has bid the price so high.

1) Iran. The market thinks that we might ultimately invade Iran and Iran is a huge oil producer. They are second only to Saudi Arabia in OPEC. But I believe that Iran is bluffing about their nuclear ambitions. They know we will never let them have nukes. They are trying to get the U.S. to sit down with them and offer concessions that we won't invade them and topple their government just because we really don't like them. It is high stakes poker and Iran doesn't have any cards. They aren't crazy. At least I don't think they are crazy. Okay I really hope they aren't crazy. Fuggetaboudit.

2) Nigeria. Nigeria has already experienced a huge disruption in the flow of oil. Their government has lost $1.5 billion in oil revenue. It can only get better from here.

3) Al Qaieda. Those evil-doers recently tried to blow up a Saudi refinery. This probably means that from now on, major refineries will be top on the list of terrorist targets. I agree that this is bad news for oil prices, but let us look on the bright side. They FAILED to blow up a Saudi refinery. FAILED. C'mon guys.

4) Prices are going up and demand is not dropping. The biggest reason oil prices are climbing is because they can. It seems that demand for oil is, as the economists say, inelastic. In other words, we'll buy it regardless of the price. Well this just isn't true. There is a time lag. When you pay $3 per gallon at the pump, you don't sell your SUV that day and trade it in for a PRIUS. It takes some time. But it will happen. And when it does, look out below.

Without the fundamentals supporting current oil prices, any good news (a cease fire in Nigeria, a deal with Iran, Osama on a stick) will shock the markets into a very swift sell off. Oil will settle at a price that is more in keeping with its fundamentals. In other words, it will settle at the price that OPEC wants it to be, which is to say $50 per barrel or so.