Bloated Oil Prices Mysteriously Plummet

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Bill Georgevich reporting

The per barrel cost of oil has plummeted 50% from $140 per barrel to under $70 a barrel in less than 4 months; shocking consumers and oil producers alike. In a recent emergency meeting, OPEC ministers admitted that there really is no relation between demand and prices. Despite cutting production by 1/2 million barrels, oil prices continue to follow the stock market.

The AP reported that on Thursday, October 23, Iran called on OPEC to slash oil production by a daily 2 million barrels to stop a steep slide in prices that has left crude at its cheapest since last summer.

Other oil ministers of the Organization of Petroleum Exporting Countries also said output cuts had to be discussed at their meeting Friday — while suggesting that a fine line had to be walked to stop the market's decline without further denting shaky world economies.

Spooked by prices that have slid more than 50 percent from record highs of around US$147 a barrel in July, the 13-nation OPEC has little choice but to scale back production.

OPEC Secretary-General Abdullah al-Badri said before a meeting with Russian President Dmitry Medvedev on Wednesday that he would not ask Russia for oil production cuts as global prices fall, and analysts said Russia was unlikely to agree to coordinated production cuts, given that it already is battling with falling output as West Siberian oil fields mature.

In the past, sizable cuts in OPEC production have led to significant jumps in prices. But with demand already falling due to the economic downturn in the U.S. and other major consumers, even a large reduction may fail to prop up the market.

Meanwhile, in America, the nationwide average price of gasoline fell to less than $3 a gallon — to $2.991 on Saturday and then $2.954 on Sunday, travel organization AAA reported. On Monday, it dipped again — to $2.923.

It's the first time gas has been that cheap since February. And pump prices will likely keep falling. Based on the current wholesale price of oil, consumers can expect to pay $2.80 or lower by Halloween, says Peter Beutel, president of Cameron Hanover, an energy risk management firm. "If everything stays the same, we've got more coming," he says.

When the financial markets imploded in late September, U.S. drivers slammed on their collective brakes. Demand for gasoline, which had been slipping 2% to 3% each week for most of the year, sank 9.7% in the week ended Oct. 10, according to the Department of Energy.

The financial market meltdown "kicked demand loss into another gear," says Beutel.

The state average on Sunday was under $3 in 32 states, according to AAA. Cheapest: $2.539 in Oklahoma. Most expensive: $3.899 in Alaska.

"The economy is quite sick, and that's why demand is down …, and that is the major, if not singular, cause of the cheap-gasoline effect," says Tom Kloza, senior analyst at the Oil Price Information Service, a consulting firm.

When fuel prices drop before a national election, says Kloza, some people suspect the administration is interfering with the market to curry favor with voters. But Kloza says the global petroleum market is too big and complex to manipulate like that.