Oil prices fell sharply Thursday as the dollar moved higher and forced crude to lose some of its appeal as a hedge against inflation.
The weak dollar has contributed mightily to the rise in oil prices that we’re seeing in the US, and if the dollar regains a bit of power oil prices will go down a bit.
However, though speculators are undoubtedly helping drive up the price of oil, it’s not an “oil bubble,” at least not like the two bubbles I’ve been repeatedly told the oil bubble is like, the DotCom bubble and the housing bubble.
The biggest difference a simple-minded bloke like Murdoc sees is that the demand for oil, which is real commodity with a great deal of practical value around the world, is only going to keep rising. No matter how much Americans scale back their driving, no matter how often we carpool, no matter how many high-mileage minicars we buy, growing demand from India and China is going to outstrip our conservation.
The demand is real demand for a real product that is really finite. When the “oil bubble” bursts, prices will come back to earth a bit and we’ll all be glad for it. But I’m not expecting any earth-shaking deals on gas.
For the sake of argument, if all the sudden flurry of gas conservation in America were to somehow drive the price of gasoline back down to $2.50, what would happen? Would we all happily fill our tanks with relatively cheap fuel?
Yes we would. And we would do so at a rate that would blow all of our careful conservation to smithereens. If our conservation at high prices brings the price down, the lower prices will put an end to that conservation and prices will go back up. To the extent that our personal habits can affect gas prices, our habits will just change back once the limiting factor of higher prices is removed.