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Bill Freehling is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Bill Freehling.

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Fluctuations in oil prices show how fickle market can be

RECENT declines in crude oil prices are a textbook example of how quickly market sentiments can shift.

Less than two months ago, a barrel of crude was priced at $147. Goldman Sachs was predicting $200 oil due to the rapid increase of global demand and limited supply.

Since then, oil has steadily declined, bringing lower gas prices to relieved consumers. Oil recently traded around $115 a barrel, making the $147 price appear bubbly.

A couple of months ago, the financial press seemed nearly unanimous in its doomsday outlook of skyrocketing oil, but now the pendulum appears to have swung to the other extreme.

This week, I came across an article on oil posted on SeekingAlpha.com. The title summarizes the argument: "Forget $100 a Barrel–Oil Will Plummet to $30." The author was Jason Schwarz, options strategist for Lone Peak Asset Management in California.

Many of the more than 100 comments under Schwarz’s article are highly skeptical of the author’s thesis. But he makes some interesting arguments as to why oil is heading to between $30-$50 per barrel. Among them:

  • OPEC has said it doesn’t want high oil prices, and it meant it. The organization knew that new technology could crush demand for oil if prices got too high. Now all the major car companies are investing heavily in hybrids and other fuel-efficient engines, thereby leaving OPEC with a product less in demand.
  • If gas prices get too high, people will simply cut way back on their driving. Schwarz shows data that Americans drove about 5 percent fewer miles in June 2008 than the previous June. People are shunning SUVs and buying gas sippers, further reducing oil demand. "Americans have proven how easy it is to adjust to high oil," he writes.
  • The next president of the U.S. will focus more on alternative energy than any previous administration has done. Expect this to lead to the proliferation of nuclear, wind, geothermal and solar alternatives. The author argues that other nations will do the same.
  • New oil is plentiful. Drilling rigs are booked until 2012, and recent oil finds should increase supply.

Is Schwarz correct that the price of oil is going to keep falling? That remains to be seen. But his provocative argument is interesting. If oil was indeed in a bubble this summer, it’s following the same path that technology stocks took in 2000 and that housing is taking now.

In other words, market sentiment shifts quickly, leaving those late to the party holding the bag.

Permalink: http://news.fredericksburg.com/businessbrowser/2008/08/24/fluctuations-in-oil-prices-show-how-fickle-market-can-be/

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