Oil Hits 3 Month Low at $121 With Plenty More Drop to Go

The drop in oil prices of almost $24 per barrel has started to shift much of the conversation. Instead of talking about unlimited demand and shrinking supply, people are returning to economic fundamentals, and realizing, like real estate, that nothing goes straight up forever.

The chart below pretty much tells the story as far as I'm concerned.  Nothing naturally goes up like that and continues to accelerate at that rate.  It's not natural.

Oil Price Chart

If economics works at all, then supply and demand work in tandem.  That  means that when prices rise to an excessive level, demand begins to decrease and supply increases.  Demand for oil is decreasing as Irwin Kellner says in his excellent article:

"What is even more interesting is the reason for this plunge. It is not so much due to increased supplies of crude as to decreased demand for the black stuff. This is indicative of a major change in lifestyles, personal and corporate.

Supplies of oil ebb and flow depending on the weather, strikes, terrorism and the like, so it's hard to tell if there has been any significant change. Demand is easier to track, and here the results are startling.

Take gasoline, the biggest use of oil in the U.S.. Instead of rising 1 or 2% a year as it usually does, gasoline use has been falling, year-over-year, for most of this year.

No mystery why: Americans have been reducing their driving for some time, with the year-to-year percentage decline in miles driven growing month by month.

In March, the yearly decline was a bit over 3%. That was the biggest drop in miles driven since 1942. May's drop of nearly 4% over last year was the most ever, according to the Transportation Department."

When you see a chart like the one above, where there is a sudden and massive spike upward, be afraid, very afraid.  And remember that gravity is one of the elemental forces in the universe.  What goes up, will come down.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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