Oil on demand

Just under two weeks ago, the oil industry was abuzz about Hurricane Gustav’s threat to the Gulf Coast, home to 25 percent of U.S. oil production. Oil rigs were evacuated, production was halted, and the market braced for a battering. Luckily, Gustav weakened just as it approached the most heavily concentrated areas, and the damage to the oil infrastructure was minimal. Phew.

Now the oil market is contending with a number of new worrisome factors, which would usually drive oil prices up. Ironically, we’re seeing them edge lower: yesterday light sweet crude settled down 68 cents to $102.58. That’s the lowest closing price since April 1. How could this be?

Well it’s all a question of priority. At a volatile time for all industries, the oil market is trying to determine which are the greatest boons and which are the greatest threats to crude, and that balancing game can be a tough one. Let’s consider some of the most pertinent factors dancing around in analysts’ heads.

1. Hurricane Ike is approaching the Gulf region. The oil industry is closely watching all storms following Hurricane Gustav, and many oil companies have stopped sending workers back to offshore rigs, according to the government’s Minerals Management Service. The service estimates that 452 of the 717 manned production platforms remain evacuated. That means production is way down, and reports that Hurricane Ike may strengthen to a Category 3 storm are not providing much solace.

2. OPEC has decided to cut production to keep oil prices high. OPEC, worried that oil prices will continue to fall, has decided to return to oil production levels from a year ago, about 28.8 million barrels of oil per day. That will mean about 520,000 less barrels of oil per day, which OPEC members hope will keep each barrel trading at around $100.

3. Global demand for oil is faltering. This is the big one, folks, and the reason that oil prices are dropping. The economic downturn we’ve been experiencing in the U.S. is spreading to Europe and, as Americans have decreased our oil and gas consumption, even China and India couldn’t pick up the slack. The International Energy Agency this week drastically cut its 2008 and 2009 forecasts for global oil demand. With consumers now more aware of how much it takes to fill up their tanks, oil producers are feeling the effects and getting increasingly nervous as car producers invest in research into alternative energies.

Dropping oil prices indicate that, even though hurricanes and quotas are threatening to limit oil supplies, demand is the main concern of the day. This may, however, be beneficial to the average consumer. After all, lower oil prices will translate to lower gas prices and, if we can learn to rely less on oil in general, all the better.