Crude oil price - good example of the crisis

Crude oil price changes may be considered one of the best examples of the scale of the crisis. In the first half of 2008 the price of oil was going up and up, reaching almost $150, and many experts predicted it to go even higher. Now, the price is around $50-$55, so it went down more than 60% from the top.

Of course there is a good fundamental reason explaining why the oil is diminishing in value. The crisis began and suddenly all major economies are predicted to go into recession. If GDP growth will slow down (or even stop in some economies), the demand for oil will be lower. That’s why oil is losing its value.

However, it is not so simple. The truth is, that the oil market is a good example not only of the crisis itself, but of the reasons of the crisis as well. The market was full of speculation and the price of almost $150 was never fundamentally substantiated. Creativity of the financial institutions for creating financial instruments - derivatives connected not only on the oil market - was so big, that some markets were flooded by a virtual demand. Oil market was a good example of this mechanism. After the bubble burst, it all came back to the beginning.

Anyway, the low price of oil is a good sign, because it can help the major economies in easier recovery from the crisis, because the production and transport costs, so important in every business, will be significantly decreased.

Tags: oil price