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Saturday, September 26, 2009 CE

What happened to the oil prices during 2009? What will happen in the future?

The oil price reached a peak in July of 2008. As the financial markets collapsed and a severe recession established itself, the demand for oil decreased globally. This happened as a consequence of generalized diminished economic activity. As a result of this, the oil price decreased significantly reaching levels not seen in many years. Gasoline prices, natural gas and coal also decreased accordingly since they also are used to power economic activity. During 2009, the energy prices have increased steadily. News related to an economic recovery usually are associated with increases in oil prices. News related to the persistence of the recession such as the unemployment rate and the bank failures are associeted with decreases in oil prices. It is important to point out that the current oil price almost doubles the value at the start of the year, taking into account that the world economy has not fully recovered.

According to the information available, the oil prices depend on the following:

a.- The relationship between its supply and demand.

b.- Market speculators since the commodity can be traded easily.

c.- The purchasing capacity of the dollar.

The relationship between supply and demand seems to show a pattern of inability of supply to keep up with demand. This was clearly visible in the easily available charts of IEA and other entities. In the years leading to 2007, in the midst of global economic growth, the supply side of the equation was not able to keep up with demand increases, the consequence were price increases.

Market speculators probably helped pushing the price up, specially after the first signs of financial collapse when the cash available from the fleeing the financial sector was used to appreciate the value of commodities.

The purchasing capacity of the dollar has been diminishing progressively as more dollars need to be printed to cover the financial deficit. If we compare the value of oil with respect to gold, its increase has not been as steep.

What we are probably going to see in the future is an oil price that will increase and decrease based on the overall economic activity since the supply side is under too much stress. High oil prices will slow down economic growth and limit recovery attempts. Speculation will remain a player, making the swings in the oil price steeper than expected from regular supply/demand curves. The value of the dollar will continue to decrease and, as a result of that the oil price will have a trend towards always higher. How high? This will probably depend on the inflation rates of the U.S.A in the maintenance of the dollar as the global reserve currency.

This is an opinion post. What I have posted here reflects only the results of my understanding of issues about which I am not an specialist but an aficionado.
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