Friday, October 17, 2008

OPEC calls emergency meeting as oil plunges below $ 70 barrel


The NY Times reported that oil prices dropped below $70 a barrel for the first time in 14 months on Thursday, causing OPEC to call for an emergency meeting next week to establish some stabilize oil prices. NY Times link  Oil prices have slid nearly $40 a barrel in three weeks because demand for energy is expected to drop as the global economy slows.  Oil traded at a record $145 a barrel during July 2008. 

OPEC might allow prices to stabilize at a relatively low level ($80-$100) in the hopes that lower oil prices will provide an economic stimulus.  According to the NY Times, consumers would have $250 billion more, over a year, to save or spend elsewhere if oil prices stayed at the current level.  Based on pessimistic predictions about the extent of global economic slow down, some analysts expect price to fall as low as $50 a barrel during the winter.  Natural gas prices have also fallen from their summer peak of $13.58/TCF to $6.81.

Volatile prices, along with the credit crisis, have created significant disincentives for large investments in long-term oil and gas projects -- which in turn could lead to oil and gas shortages when the global economy turns around and global demand for oil and gas increases.  That raises the prospect of skyrocketing prices that might moderate or interfere with recovery. The NY Times noted that growth in demand has outstripped the ability of oil producers to increase production: "Many experts have predicted a new squeeze within the next five years that could once again propel oil prices over $100 a barrel."

I'll wager that prices five years from now (based on a 3 month average) will exceed $125.

Economics, Energy | Permalink

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