Why Oil Will Never Hit $200 a Barrel

Why Oil Will Never Hit $200 a Barrel

Oil is going to $200 per barrel. Or is it $300? I forget.

Then again, I don’t agree, because I know something about oil that many seem to overlook. That is, oil is its own worst enemy.

There are many reasons why the price of oil is moving higher at the moment, including central banks around the world printing money with abandon, the stable demand for oil that is a combination of falling U.S. demand and rising demand from developing nations like China, and geopolitical concerns about Iran, Yemen, Syria and others.

All these things drive the price of oil up. But there is a counter-force at work with the price of oil… something that will prevent oil prices from ever reaching the $200 mark.

This counter-force doesn’t come from the oil companies, or political parties, or even car manufacturers as they try to foist electric cars on us.

No. This force is closer to home.

This force is you and me – the end-user of oil and oil-based products. And it has a name – self-limitation.

You see, oil – or better yet, the rising price of oil – is a self-limiting commodity. The higher the price goes, the more motivated, and the more likely, we are to use less of it.

When gasoline reaches $3.50/gallon, and marches toward and then over $4.00/gallon, we begin looking for ways to curb our consumption. We begin to batch our driving errands, trying to get as much done as possible in one trip. We park the big cars. Suddenly, the gas-guzzling, high-profit, big pick-up trucks sold by domestic car companies stop selling. None of which is surprising. After all, consumers today are very price conscious, particularly now, right after the greatest economic downturn in a generation.

While not math geniuses, we’re able to figure out that spending more on gasoline, while not getting any greater use out of it, has a detrimental effect on our standard of living. When more of our money goes to filling up the tank, we have less to spend on eating out, going to the movies and drinking beer.

And I might be wrong, but I’m pretty sure most red-blooded American males would rather drink their beer and drive a Chevy volt that uses electricity, than hang on to their Chevy Suburban and have to give up the beer. Being a Suburban owner, I can attest to this.

If We Stop Buying, They Stop Selling

Oil’s self-limitation doesn’t stop with the end user. The main suppliers of oil get just as upset when the price is too high, because they recognize the predicament.

In 2005, then-President George W. Bush made U.S. energy independence a plank of his State of the Union address. In the U.S., the speech was a yawner, but around the globe, oil-producing countries were outraged that the U.S. President would be so bold as to lay out a unilateral energy policy.

You see, if we start buying less oil, then the oil companies start selling less of their product. And if we buy less oil because we’re moving to other energy sources not controlled by energy producing countries, then we, as customers, are lost to them forever.

When all you produce is oil and sand, you try to protect your oil business in any way you can. And runaway prices that drive off customers who will then never return is very, very bad for business.

Oil might spike now and then. There might even be good reason for the price rise. But don’t buy into the $200/barrel scare-story. The forces fighting against such a price spike are simply too strong.


Rodney

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Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.