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Why Are Oil Prices Falling?

Many explanations, no clear answers

By Mark Huffman
ConsumerAffairs.com

September 4, 2008

• OPEC Unable to Stop Gas Prices' Slide • Give Thanks for Falling Gas Prices • Gas Prices Fall Below $2 a Gallon • Oil and Gas Supplies Rise • Gas Prices Accelerate Their Decline • Gasoline Prices Down 19 Cents in a Week • Charlotte Gas Stations Make Refunds to Consumers • Oil Snaps Back As Markets Sense Post-Election Bounce • Gas Prices Settle Still Lower for Weekend • Gasoline Prices Keep Falling • Gas Below $3 Nationwide • Average Gas Price Down to Nearly $3 a Gallon • Gas Prices Drop, Along With Oil • Gas Prices Head Lower as Economy Slows • Gas Price Declines for 9 Days • Gas Prices Continue Downward Trend • Oil Prices Surge By Record $25 a Barrel • Gas Prices Drop for 5 Days • Price-Gouging Probes Spread to 6 States • Investigations of $5 Gas in North Carolina, Florida, and Virginia • Shortages, Price Hikes Follow Ike in Southeast • States Investigate Gasoline Price Gouging Claims • Pumping More U.S. Oil Won't Lower Prices, Consumer Group Says • Oil Prices Fall, Gas Prices Surge • Gas Prices Slide 8 Percent from Record --- • More ...

What goes up must come down, and that, to consumers' relief, has been the case with oil prices. But consumers might also be curious about why prices, after rising like a rocket for the first half of the year, are now falling just as fast.

After all, very little seems to have changed since July 11, when oil prices topped out at $147.27 a barrel. Why is oil trading at below $110 a barrel now?

In the first half of the year analysts explained oil's dramatic rise as a result of the world's unrelenting demand for it. It's not just demand in the U.S. that influences the price, they explained. Now, developing countries like India and China have roaring economies and an insatiable appetite for petroleum.

In recent weeks there have been some concerns that economies and India, China and other countries may be slowing a bit, but there hasn't yet been much evidence of that. And the long awaited recession in the U.S. has yet to materialize. In fact, the latest Gross Domestic Product figures show the U.S. economy actually grew 3.3 percent in the second quarter.

One possible explanation for the drop in oil prices is new strength in the dollar. Since oil is priced in dollars, an increase in the dollar's value makes the value of oil less. Still, that might not explain the sudden collapse in oil prices.

Could it be that previous threats to the oil supply, which caused massive price spikes in the first half of 2008, have disappeared? Well, not really. Just last week, as Hurricane Gustav bore down on the Gulf of Mexico oil rigs, oil prices hardly dipped at all, even though all drilling had to stop as the storm approached. When the storm passed without inflicting much damage at all, the price of oil dropped $6 in one trading session.

Perhaps it is the market, after all, that is at work here. Speculators who rode prices higher in the first half of the year, have decided, for whatever reason, that the market has peaked. They appear unwilling to bid the price of oil higher.

"People are starting to realize that if we can't rally oil with a 100 percent shutdown (in the Gulf) then this oil run is probably done," Phil Flynn, energy analyst at Alaron Trading Corp. in Chicago, told the Associated Press.

And what does all this mean for consumers? In the four days since Gustav passed through the Gulf, U.S. gasoline prices have fallen each day. The average price of regular unleaded gasoline fell another 0.3 cents Thursday to $3.678 a gallon from $3.681 a day earlier, according to AAA.

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