Thursday, December 04, 2008

The Cure for High Prices? Why, It's High Prices!

An old commodity adage is, “The cure for high prices, is high prices.” And, we’ve seen that in the oil market in 2008.

In my travels around the USA this year, I’ve been amazed at the number of times that I’ve spotted oil rigs along the road drilling for oil and gas, something that I’ve not seen as much of in past years. Was it a coincidence, or were there more rigs operating in the country? Here’s what I found out.

Baker Hughes does a weekly count of the number of oil rigs operating in the USA. It hit an all-time low in 1999 when oil dipped below $20/barrel (Do you remember those days of $1 gasoline?). In July, when oil peaked at $146/barrel, the rig count had quadrupled to over 2,000, the first time that it had shot across that threshold since 1985. Now that oil is falling in price, so is the rig count, which was down to 1,941 in the latest report.

The peak for rigs was in 1981 when they very briefly topped 4,500 rigs operating. The fall-off in drilling in the 80s was caused by falling oil prices and the high cost of credit. The joke in oil towns back then was, “Open a bank account and get a free oil rig.”

The other side of the supply-demand equation is that we are driving much less this year than in 2007. The U. S. Department of Transportation reports that we drove 78 billion fewer miles in the first 10 months of this year when compared to the previous one, about 5% less.

It’s supply-demand at work! And, the cure for high prices, is just that, high prices.

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