Elements of oil price relief are falling into place*

Except for that pesky asterisk, elements of relief from painfully high oil prices are falling into place.

Bob Tippee

Except for that pesky asterisk, elements of relief from painfully high oil prices are falling into place.

The asterisk points to a footnote that must accompany all market forecasts—the one repeated so often it begins to lose attention. So here it is: *

Relief from stressful oil prices requires changes not only in basic forces of the market but also in extraordinary factors pushing up the price of crude.

In the former category, relaxation of worldwide oil demand seems finally at hand.

Consumption has quit rising in the industrialized world. But it continues to grow elsewhere, especially in rapidly growing countries where government subsidies shield oil consumers from price hikes.

Governments, though, are yielding to the strain. Indonesia, Malaysia, and India are among countries that have announced politically difficult increases in the prices of oil products. China is so far retaining price controls but reimbursing state-owned oil companies in an apparent attempt to prevent shortage during this summer's Olympic Games in Beijing.

As those moves slow demand growth, new supply should emerge from oil fields due on stream this year in major producing countries, although a pattern of delays in large projects has become as relentless as depletion.

One of the extraordinary forces lifting oil prices seems to have changed course. The US dollar already was strengthening when Federal Reserve Chairman Ben Bernanke on Jan. 3 hinted at a conference in Barcelona that monetary policy would be more attentive than it has been lately to the greenback's value.

Many analysts think a weak dollar, partly the result of the Federal Reserve's antirecessionary lowering of interest rates, has boosted the price of oil.

And at some point the recently strong investment tilt toward commodities will ease as allure returns to other types of assets. That tilt, too, has raised oil to some degree.
These developments are ingredients for oil prices lower than they have been. But don't overlook the footnote.

*Forecasts for lower oil prices assume the absence of major disruption, political or natural, to oil supply. In the Gulf of Mexico, lest anyone forget, hurricane season has begun.

(Online June 6, 2008; author's e-mail: bobt@ogjonline.com)

More in Editor's Perspective