Economic Concerns Plague Oil Price

Crude oil futures are reaching the lowest levels since 2005 on concerns about the health of the global economy and its impact on energy demand. A sharp slowdown in global growth will spell reduced demand for oil and the lower price will impact planned drilling projects. The whole oil industry will re-evaluate new projects and expansions of existing projects. They will be re-assessed based on the current economic circumstances. Instead of evaluating projects at $80  or $100 per barrel, they will be using $65 per barrel or less. Future price levels will primarily depend on the magnitude and duration of an economic downturn as well as OPEC and non-OPEC producers behavior. Even the recent announcement by the Chinese that they are implementing a $586 billion economic-stimulus package aimed at reversing slowing growth has failed to overcome the economic concerns. Also, neither the news that Saudi Arabia told refiners that it would cut December supplies 5% or the fact that OPEC producers agreed to cut their output quota of 28.8 million barrels per day by 1.5 million bpd starting November 1st had any effect on the oil price decline.

Politicians in power were complaining about oil traders and speculators driving the oil price well above $100 per barrel on concerns of a tight oil market. Now,  when these same traders are driving the oil price down on concerns about the U.S. and global economy, you don’t hear a peep out of these politicians. Irregardless of the fact that the oil price is now $56 per barrel and gasoline is below $2.00 per gallon, you still hear of plans for a windfall profits tax on the oil companies by the President-Elect and the Democratically controlled Congress. I suspect that shortly after inauguration, legislation on a windfall profits tax will be formulated. Since the oil price has already declined significantly, the added tax might be applied to all incremental profits as the oil price goes back up above some trigger price such as $70 per barrel. The more greedy politicians will try to make the tax retroactive. Such legislation will only result in higher prices for the consumer and less domestic oil supply.