Will oil stay cheap?

And you thought it would never happen. Last July, fuel prices were flirting with the P60/liter mark, and people everywhere were scrambling to cope. SUVs stayed parked in the garage, the MRT lines swelled, and sales of LPG systems and frugal vehicles like motorbikes, econocars, and diesel trucks and SUVs picked up. But now... prices are going back down.

Yesterday I drove by a Petron and read P43 for a liter of unleaded; around what it cost back in the summer. Is it time to switch back to gas? Snap up that gas-guzzling SUV at the dealer? Not so fast, Juan.

What we’re seeing right now are manifestations of the oil market economy as it continuously strives to find the right balance between demand and supply all around the world. As the full repercussions of the US recession come into play, with lower consumer confidence amid mountains of debt, the big oil players like Exxon, Shell, and Chevron, along with the numerous oil traders, realized that there just aren’t that many people willing to fork over $4 for a gallon of gas (or P59/liter here) anymore. Every price rollback is just indicative of the ever-lower threshold we’re willing to pay for oil. After the peak of $147/barrel, oil is now trading below $56, and that translates to price cuts at the pump.

But it can’t rollback forever, just as the US won’t stay in recession forever. Sooner or later, depending on how US president-elect Obama pulls it off, the US economy will recover and with it, hopefully every other economy that does business with them. But even billionaire Warren Buffet admits that oil will really be more scarce in the future, who has said that, “The ability to produce 10 percent or 12 percent more than the world needed was there, and we got lulled into thinking – we just kept assuming – it would always be there. But there isn’t any tap to turn on now.”

Access to oil hasn’t gotten any easier either in the preceding four months. Nigeria is still plagued with civil unrest, and Russia and Venezuela are still not the easiest of oil producers to do business with. So the problem is still there. Even though Saudi Arabia can be counted on to open up its fuel reserves in the event of a crisis, the global demand is still heavier than the supply. According to Roger Lowenstein an outside director of the Sequoia Fund writing for the The New York Times in “What’s Really Wrong with the Price of Oil?” (Oct. 19, 2008), “What frightened markets last spring was the awareness that capacity was flattening at the same time that a strong global economy was pushing demand rapidly higher. And emerging nations would seem to have a lot of oil-demand growth ahead of them. While the U.S. consumes 25 barrels of oil per capita annually and Europe 10 barrels, each Chinese consumes two barrels a year. Given their numbers, even a small amount of growth in Chinese consumption will offset a great deal of conservation in the U.S.

Exxon, the world’s biggest oil company, is also bullish on its future, according to an article by Jad Mouawad in The New York Times this November 16: “At Exxon, Making the Case for Oil”. According to Exxon’s own outlook, global oil demand is set to reach 116 million barrels a day by 2030, up sharply from 86 million barrels a day today. Meanwhile, renewable fuels, like solar and wind will grow at a brisk pace but they will account for just 2 percent of the world’s energy supplies by then, according to Exxon, while oil, gas and coal will represent 80 percent of global energy needs by 2030.

So, no, fuel economy has not suddenly gone out of fashion. Anyway, as welcome as today’s fuel prices are, they’re still higher than what we were paying for as early as last year. Every year the price just goes up and up. We may not have to swallow P60/liter (or higher) fuel for the rest of the year and maybe even in 2009, but I wouldn’t be too sanguine when it comes to the choice of vehicle. Think of the price rollbacks as a reprieve from the inevitable. Best to get a frugal vehicle now than get stuck with a guzzler when the price of fuel goes back up in tune with economies everywhere.

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