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Oil Prices And Godot

I am still awaiting mea culpas from those who believed that “price gouging” and “speculation” were behind the increases in oil prices earlier this year. As is once again being made clear, supply and demand are the key determinants behind the price of oil–as with the price of other products and commodities–and it is supply and demand that is currently lowering the price of oil:

Oil prices fell below $106 a barrel Tuesday in Asia – $10 below its close Friday before the Labor Day weekend – as investors shifted their focus to slowing global demand after worries about Hurricane Gustav subsided.

Light, sweet crude for October delivery was trading at $106.03 a barrel in electronic trading on the New York Mercantile Exchange midafternoon in Singapore, and at one point dropped as low as $105.46.

On Monday, when U.S. trading was closed for Labor Day, the contract had plunged $4.34 to $111.12 a barrel in late electronic trading. On Friday, the contract settled at $115.46 a barrel.

Traders were relieved that Gustav weakened as it approached the offshore oil rigs and Louisiana refineries, and appeared to have caused less damage than expected in New Orleans and surrounding areas.

But they quickly turned their attention to slowing global economic growth, speculating that will dampen demand for crude oil, even in developing countries such as China and India.

“The market continues to be weighed down by worries of a global economic downturn and slowing oil demand in developing markets,” said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore. “Action by OPEC and supply side concerns should put a backstop to any sharp price drop.”

Can we finally gain a comprehensive understand of the economics of this issue after having seen what we have seen concerning the price of oil? Can we at long last dispense with the absurd argument that speculation and price gouging are behind increases in oil prices?

Probably not. But a man can dream.

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