The Demand Driven Market Which Is Oil

It is hard to imagine the way it used to be. A barrel of oil hit $120 barrel today, as traders were getting nervous about rebels in Nigeria.  $120!  For 20 years between 1984 and 2004 the price of oil was about $30.  Everybody it seems has a story about gas.

For instance many of you know I’ve driven a 23-year-old Dodge truck seemingly forever.  However, last year it finally stopped running and I bought a new Ford F-150.  The first time I filled it up with gas, the pump kept running past $50.  I almost had a seizure when it hit $90.  (Yes it has a bigger tank)  So with oil prices up toward $112/barrel last week it cost $140.  I run around my farms for a while and then I have to fill up again.  This time it costs me $165.

Of course I think I’ll hide in my toolbox the next time I have to fill up.  Will I break the $200 barrier?  I remember thinking $50 in old Dodge was the high water mark for fuel expenses.  I cannot see how the Ontario economy can cope with this.  I think everybody will need to adjust to maintain any semblance of lifestyle.

Consider Chatham-Kent for instance.  As many of you know I live on a farm very close to the former town of Dresden.  Traditionally in smaller centres people travel to bigger centres to get just about anything.  For one thing, many goods are not available in a smaller centre, or people desire greater variety.  Chatham-Kent is a quintessential example of this as people in Dresden or Wallaceburg often travel to Chatham or Sarnia.  People in Tilbury do the same except they might go to Windsor more often.  It’s just what people do.

Clearly though, its going to have to change.  Fuel prices are on everybody’s mind and increasingly this type of consumer behaviour within Chatham-Kent will be curtailed.  Simply put no matter who you are, indiscriminate transportation to a bigger centre is becoming cost prohibitive.  For a municipality which is based on everybody looking toward the centre, the implications are ominous.

However, in the face of many economic problems through the years people just don’t look over the precipice and recoil in horror.  No matter how much some high priced analysts think, “Commodity prices are cyclical”.  Yes, even oil may go down and down significantly in the future.  People adjust by changing their habits.  In the face on increasing transportation cost pressure going forward, everybody will seek new ways to battle those costs.

At least that’s the way it’s always been.  You have a commodity like oil with high demand and some supply hiccups.  Things get out of whack a bit, conservation kicks in and then you have price retreat.  The only problem with this current oil situation is its demand driven.  With China and India taking to buying cars, oil demand is expanding.  It’s not a supply driven market.

If you want to know the difference between supply driven and demand driven market take a look at wheat.  Wheat futures prices are now in the $7 US range.  However, this is about half price from where they were three months ago.  However if you listen to the “food inflation” debate, you’d think wheat had never been higher.  Nobody likes telling the story about how its now half price from those lofty levels last February.  Simply put, there is a lot of wheat in the ground and buyers know that.

It’s the classic supply driven market.  The reason that wheat prices went up was a culmination of a two year drought in Australia, poor crops in the former states of the Soviet Union and an untimely spring frost in 2007 across the US wheat belt.  It was like the perfect supply storm.  Wheat buyers as winter 2008 hit, were scrambling and at the end of the day it did get out of hand.  With the northern hemisphere’s wheat harvest only nine weeks away soon there will be wheat everywhere.

However, wheat is not oil.  The world doesn’t want more and more and more wheat.  The world seemingly wants more and more and more oil.  Adjusting to it is everybody’s challenge.  However, I think it is going to take more than that this time. New technology might be the answer.  However, with gas prices where they are now, that reality seems so far away.