Oil Price Decline -- What it Means

Amidst the continuing economic slowdown, the New York Times reports that oil has dropped from its July 11 peak of $147 a barrel to under $90 today. This decline in price can be understood as a natural market correction, reacting against soaring energy prices which forced both a slowdown in economic growth and a new emphasis on conservation and efficiency.

It is likely that oil prices will continue to decline in the short term, as world economies sink further into recession and depression, diminishing global demand. For nations dependent on oil revenues like Russia, Saudi Arabia, and Iran, this decrease in oil prices will compound the problems of the financial collapse by further shrinking government revenues.

We can expect oil prices to follow overall economic performance for the most part, since energy demand is dependent on the ability of companies to grow and use ever-larger amounts of oil. If companies are not expanding and individuals are cutting their use of expensive oil, a continuing decline in price is inevitable.

At this point, one of two things can happen. Either globally-shrinking economies will demand less and less oil, forcing a lasting decrease in the price of oil, or an economic rebound could cause a spike in demand that sends oil prices well over $100 a barrel once again. At this point, the sad state of the U.S. economy indicates that the former is more likely. (Although further discoveries regarding peak oil could also cause a spike in the value of oil.)

Unfortunately, oil prices will tend to limit economic growth, since any growth would necessitate greater energy demand, meaning higher oil prices. Until we can secure alternative sources of energy, the price of oil will remain a virtually insurmountable obstacle to sustainable economic growth. Do not be fooled by this decline in price -- it is the reflection of the world's dire situation, and it could very well signal an impending collapse that would dwarf those we have seen.