Oil touched a trading record of $145.85 last week before closing at a record $145.29 a barrel.
Analysts are quick to attribute much of the sell-off to simply profit taking after the previous weeks' gains--a correction. Others say that a recovery in the U.S dollar 's strength keeps prices low as traders back off from commodities.
At the same time, fears of global oil supply disruptions have abated, and there are concerns that the global economy is facing a slowdown which is ironically, being partly fueled by high oil prices.
So, is it now the time to rev up that gas guzzler in the garage, and take that much postponed vacation?
Not yet, caution the pessimists. Analysts warned that the pullback could be ephemeral.
“Sagging global equities, which are tipping a lack of confidence in economic growth in both developed and emerging economies, helped trigger the retreat in the energy markets,” Addison Armstrong, director of market research at Tradition Energy, suggested in a research note.
Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates waived off the decline as corrective--profit-taking that could still be followed by fresh highs down the road. He also surmised that computer models used by large investment funds automatically sold oil contracts when pre-set price threshold has been breached.
Correction or a bubble?
Or could this be a start of a collapsing bubble?
Along with some signs the dollar is recovering from a long slump, fears that fresh conflict in the Middle East could cut oil supplies eased over the weekend after Iran gave an undisclosed response to an international offer of incentives if it suspends a central part of its nuclear program. While in Malaysia attending a meeting with leaders of 8 developing nations, Iranian president Ahmadenijad downplayed any possibility of war with U.S. while his military has tested a few hours ago a new generation of missiles capable of hitting targets 2,000 km away.
It is Iran's subtle way of saying it doesn't want to be bullied by a bellicose U.S.
Elsewhere, there also signs that potential tinder boxes may have lost much of their gunpowder.
Iraq, seen by the outside world as a country in permanent chaos, has actually started to open its oil fields to international tender -- and there are takers waiting on the sidelines. The country is sitting on one of the world's largest oil reserves. By past standards, its internal security situation has vastly improved recently.
North and South Koreans, long aiming at each other's throats, are about to embrace each other on the streets of Pyongyang and Seoul. Earlier, the Pyongyang government effectively took the sting out of U.S. claims of nuclear design by publicly blowing up a cooling tower of a nuclear facility suspected to be a front of clandestine nuclear weapons program.
The nearby other powder keg, the Strait of Taiwan, is fast becoming a tourist route rather than a potential naval battleground after reciprocal air flights crossed it after 60 years of hiatus.
More supplies coming in
Aside from the well known reserves, there are enormous supplies sitting idly, waiting to be tapped.
In the vast eastern desert of Saudi Arabia, infrastructure work has started in what could be possibly one of the largest expansion of oil development. This patch of sand in the middle of nowhere is the Khurais oil field, one of the last of the largest undeveloped oil fields of the country.
An Aramco refinery (Image from BBC news)
State-owned oil giant Aramco is spending $10 B for the infrastructure to pump out some 1.2 million barrels a day from this and two other smaller finds of Abu Jifan and Mazalij June of next year. That volume dwarfs the production of OPEC members Qatar, Indonesia and Ecuador combined.
In November last year, state-owned giant oil producer Petroleo Brasileiro SA, more popularly known as Petrobras, announced that it has discovered an elephant oil field off the coast of Rio de Janiero. The Tupi field, as it is known, holds up to 8 billion barrels of oil.
That find could send Brazil into the big league of oil producers like Venezuela and the Arab states. It was only last year that the country became a net exporter or crude although it has to import light oil for its refineries.
That announcement immediately sent Petrobras' stock prices soaring by 26 % at the New York Stock Exchange in a single day.
To be sure, extracting the oil wouldn't come soon as the field lies under 2,140 meters (7,060 feet) of water, more than 3,000 meters (almost 10,000 feet) of sand and rocks, and then another 2,000-meter (6,600-foot) thick layer of salt. However, in the past decade Petrobras has honed its skill in deep-water oil extraction.
Meanwhile, slowly but surely, the feasibility of developing fully the vast oil sands of Alberta, Canada as well as the Alaskan oil reserves, is coming to fruition.
Shift in strategic thinking
The aforementioned events could cap the oil price rally in the short term, but what would derail the rise in oil prices in the long term is the pervasive shift in thinking among policy makers towards weaning away from dependence of fossil fuels for the world's energy needs.
From Berlin to Brasilia to Beijing, policies are taking root where definite timetables are laid down to increase the contribution of alternative and renewable energy significantly by as early as 2015. Some ambitious targets are up to 30% from insignificant lows. The policy usually goes by the name renewable portfolio standards (RPS), and it has even found its way into our very own renewable energy bill now pending in Congress. Unfortunately, not much local debate has arisen from this provision.
At the G8 meeting currently ongoing at Hokkaido, Japan, taming the wild gyrations of oil prices has occupied the center stage of the far-reaching discussions on where the world economy is heading.
Legendary oil investor and Texan billionaire T. Boone Pickens recently unveiled his ambitious blueprint to reduce America's dependency on oil by massive development of -- not the Gulf of Mexico or Alaskan oil, but wind power. At the same time, he wants to shift the use of natural gas from power production to fueling America's teeming vehicles.According to Pickens, the U.S. currently generates 22% of its power from natural gas. That fraction, according to his plan, could be totally replaced by wind power in 10 years, and the natural gas for those generating plants can be diverted to transportation use.
For a well-known figure who has breathed and eaten oil all his life, such radical shift in thinking should allow us mere mortals to ponder what he is up to. Does he know something that we don't?
But what could finally prick the the price balloon is the forecast-ed generally slowing down of world economy which is partly attributed to--surprise, the oil price itself.
The signs are all around us. Stock prices, which normally presage major economic events, have been rapidly deflating from London to Shanghai. Wall Street has likely entered bear territory officially. Recession, rather than the spirit of Christmas, is on the air.
Where are the prices heading?
Is it going to $200, or back to $100 or below?
Again, let's turn to Pickens.
He is standing pat by his earlier forecast that oil prices will hover around $150 a barrel now. But when asked what about two years from now, he said "You could get it back down to 100".
He added that the price of oil is dictated by supply and demand, not by speculators. You can take it from that.
Let us just hope that out-of-the blue political events like Washington showering Tehran with Tomahawks on a whimsical pretext of detecting plutonium stockpiles deep inside the arid sands of western Iran.
Whether the recent price movement is a sharp correction or a beginning of a long term deflation, it doesn't really matter much what the future of oil prices brings.
What we are likely seeing is a start of a cataclysmic reordering of the world's energy heirarchy.
Let us not be caught flat-footed.
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