oil prices rising due to less resession fears

**Jesseda** · 08-21-2009, 02:43 PM

why is oil prices rising due to less people worry about recession? you would thin with 1/2 million new less gas guzzling cars out there, that gas prices would be going down due to less demand for it, and if the prices go back up, spending at the stores will be less and groceries will go up yet again, that means less money to spend and want things instead of need things..

**SoonerDave** · 08-21-2009, 02:58 PM

Think of it this way, Jesseda. Gasoline isn't the only thing you can produce from oil - it also turns into a bazillion other things that feed virtually every other industry and element of commerce around, eg plastics, tires, diesel fuel, the list is almost endless.

If the economy is picking up, meaning the general demand for goods is going to increase, that necessarily means an increase in demand for the raw materials to MAKE all those things, and that means an increase in demand for oil...and that means futures prices go up.

Keep in mind, too, Jesseda, that 500,000 fewer "gas guzzling" cars is a bit of a media fiction. I don't have hard numbers in front of me, but the true net difference in gasoline consumption is vanishingly small when considered in contrast to the roughly 250 million vehicles in use (source: Table MV-1 - Highway Statistics 2007 - Highway Statistic Series - Policy Information - FHWA).

**mugofbeer** · 08-21-2009, 06:31 PM

Originally Posted by Jesseda

why is oil prices rising due to less people worry about recession? you would thin with 1/2 million new less gas guzzling cars out there, that gas prices would be going down due to less demand for it, and if the prices go back up, spending at the stores will be less and groceries will go up yet again, that means less money to spend and want things instead of need things..

There are numerous factors that go into the price of oil. First, it is a commodity and the price of oil is set by supply and demand factors. Worldwide recession, not just in the US but in Europe, China and India have resulted in a decrease in the demand for oil. There was a point hit a couple of years ago when CHina and India's economies were at their highest points where the demand for oil was about to outstrip the supply (or so they say). This, plus rampant speculation in the stock and commodities markets caused the price to spike to over $150/barrel (bl).

The true reasons are many. The estimates of the effect of pure speculation on oil was $40-50/bl - perhaps more. So, when demand for oil decreased in the recession, those who speculated on oil got caught with their pants down and oil came crashing down to $40-50/bl.

Other reasons include the fact that virtually no new refineries have been built since the 60's or 70's. There have been some expansions and I believe I read that the first totally new refinery in many years came on line in CA. World demand for oil has made the system extremely tight. If any refinery shuts down for any reason, if there is a fire, if there is an explosion - anything - can cause the price of oil to spike when the speculators jump in.

Fears of terrorism in numerous oil producing countries has a great effect on the price of oil. Any terrorism action that could interrupt the supply will make the price jump. In the US, our refining capacity is highly concentrated in Houston. There is tremendous fear of a major hurricane hitting Houston and what it would do to our gasoline supplies. This is probably the US's biggest fear.

Then there is the value of the US Dollar. Oil is still based on US dollars worldwide. When the US economy weakens and the value of the dollar drops in relation to other currencies, oil prices rise. As the US floods the economy with money trying to stimulate the economy out of recession, more dollars on top of dropping economic production in the US means the value of the dollar must fall. THis is the main reason for the recent rise in the price of oil.

Also, be sure to understand that the price of oil and the price of natural gas are totally different. They have and should be "decoupled." While oil prices are rising, natural gas prices are plummeting due to lack of demand, huge storage inventories and continued high levels of production. Until we have a really cold winter, decreased production or something else that results in an increase in demand for gas, they may continue to go in different directions.

**SoonerDave** · 08-21-2009, 09:19 PM

mugofbeer

Great, great point on the effect of addtional dollars being pumped into the economy pushing oil's price up. I fear we are at the very beginning of a rather drastic upward spiral so long as it seems inevitable that we are willing to print money to create the illusion of solvency.....

**mugofbeer** · 08-23-2009, 11:36 PM

The fed is walking a very thin tightrope. IMO, I think we are going to see continued good economic stats showing we are coming out of the recession. If that happens, the fed may start inching the fed funds and discount rate up in baby steps. If the markets can swallow the increases without getting crushed, this deficit and full scale money printing may not be as bad as anticipated. Now, it opens up that multi-thread can of worms but if they pass a public optioni health care plan, all bets are off.