Commodity Talk: Oil Price Fall To Bring Inflation Relief, 09/29/08

In light of the strengthening of the American dollar against foreign currency and worldwide turmoil in financial systems, oil prices have fallen almost 40% from their record highs set in July of 2008. But as oil falls, commodity experts predict the prices will bottom out at a relatively high level because of positive worldwide growth, oil demand, and OPEC's control over a vast majority of the world's oil. The International Energy Agency reports that although demand for oil has decreased in many markets, those declines are offset by annual growth in demand around 4% despite the high prices. Non-OPEC nations are faced with troubles arising from the high costs of oil production, skills shortages, and declining reserves. Other factors that must be considered are natural disasters such as hurricanes on the Gulf Coast of the United States, violence interrupting production as has been seen in Nigeria recently, and political tensions such as those between the United States and Iran.
What this ultimately means is that OPEC will be largely responsible for supplying future oil growth considering it controls roughly 76% of global reserves. As of now, OPEC is responsible for 43% of the world's oil output, but with the aforementioned considerations, this will likely rise over time. OPEC has flexed its muscle recently in response to low oil prices and opted to reduce output to raise prices. Saudi Arabia however ignored the OPEC mandate to reduce output and instead increased its output to ring relief to the markets. OPEC has the leverage to control prices and their actions to date have suggested that they will not tolerate prices lower than $90 per barrel, and are more comfortable at above $100 per barrel. As of right now, the drop in oil prices will relieve costs of inflation and possibly stimulate more global growth. However, the future of oil prices will remain a relatively high one due to OPEC's massive influence over the global markets.


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