Redstate

By paulseale Posted in Economy — Comments (1) / Email this page » / Leave a comment »

Lower economic numbers from European nations put significant downward pressure on the market as oil prices continued to dip today.

Why is this relevent?

To understand how to bring down oil prices we need to understand what is driving the market and how to attack such durrest which pushes oil prices higher.

There seem to be four big things which speculators are counting on to push prices higher - they include future supply (think peak oil), geopolitical actions, the dollar and the world economy. Yes, there are many more, but those I believe are the big four culprits.

This week we had Iran saying that it is more open to talks, so that has helped take some of the edge off of geopolitical matters. Similarly, we get news that the economies in Europe arent doing so well - which leads to decrease use. Both of these are putting signficant pressure downward on speculation.

The final two areas, future supply and the dollar, could also provide downward pressure on the market if the dollar was to return as king (as Larry Kudlow puts it) and we were to open up oil exploration here at home.

This is key to policy decision and understanding the current presidential race.

Right now the market is betting that Democrats will continue to get their way and there will be no new oil exploration in places we know there is oil. That means that future supplies will be limited to places which are politically unfriendly or high risk to disruption. That causes speculators to keep oil prices high, regardless of what the market is actually bearing.

Similarly, the market is also betting that the Bush administration will keep the dollar low, which I believe is a huge mistake.

The reason at the moment for keeping the dollar low revolves around the housing and banking situation. The fed is keeping interest rates and the dollar low in order to help institutions get things sorted. In the mean time many investors who are getting meager returns on their investments are turning to commodities as a hedge.

If and when the Federal Reserve decides to return the dollar as king, look for investors to return and sell off what is invested in oil, especially if the other areas mentioned are putting downward pressure on the market.

Of course if future supply is increased, the dollar improves and geopolitical matters stablize then oil could take a serious tumble.

Oil could continue to tumble if we see an expansion in nuclear power and other energy alteratives as proposed by John McCain and his Lexington project.