Posted in: Opinion,
by Patrick DeHaan on Oct 24, 2011 12:58 PM
Many motorists believe or have been asking me when oil prices will go back down now that Gadhafi is dead- and there's a simple answer. Prices won't go down simply because he's dead.
Many folks make the mistake of tying changes in gasoline prices to a leader- Saddam, Osama, Gadhafi. The real reason prices change violently in the first place could have a lot to do with the individual in charge. Gadhafi made an impact and started shutting down production of oil by destroying infrastructure. He did have a hand in significantly slowing production of Libya's high quality light sweet crude. However, now that Gadhafi is dead, those production issues still linger. That's not to say there won't be a very short lived emotional reaction in oil prices, but I don't expect an impact to stretch beyond a few days.
The bottom line here is that production in Libya, while increasing, still is rising and will need to rise to reflect pre-war output. This is something that won't simply change overnight. Crude prices may eventually come down as Libya boosts or increases output in the future, yes, but it will take time.
As we all know, oil prices rise much more quickly than they fall- at least in most cases. The one exception is that when there is concrete evidence of an economic slowdown. Remember 2008? Prices were over $4/gal in many areas, but then by Christmas were well under $2/gal. Prices can fall quickly, but because of rising demand and geopolitical tensions, the climate exists that there's more risk in getting oil, not less risk, which certainly leads to more upside in oil prices than downside.
Oil is a global commodity, not just a commodity in use in North America, and economic activity in Asia and Europe can easily make big waves here in the U.S. and Canada and can certainly impact what we're paying at the pump. Demand for petroleum in China continues to grow even as their economy slows, and while demand in the U.S. and Canada may have peaked, demand from developing countries continues to have a major impact on prices here.