1. Financial turmoil

So far it has been another week of violent price swings and falling markets as world governments dispersed countless billions in efforts to free up credit and shore up equity markets. In the last three days a veritable avalanche of government loans, programs, and interest rate cuts have been thrown at the problem from around the world with as yet little results.

Oil started the week around $92 a barrel, swung between $93 and $86 and settled Wednesday afternoon at $88.83. The overall market sentiment is that the world still is heading for a major economic slowdown that will reduce the demand for oil so much that prices could fall much lower.

This week’s stocks report shows US oil consumption for the last four weeks down by 8.6 percent from last year and gasoline consumption down by 5.3 percents. Large imports last week resulted in a 19.6 million barrel increase in US commercial inventories, a number that surely will be noted by OPEC. MasterCard reports that US gasoline demand was down by 9.5 percent last week; however some of this drop can be attributed to gasoline shortages across the Southeastern US. Average US gasoline prices, which fell another 15 cents last week, are now below $3.50 and are 60 cents per gallon below the high reached in July.

The lower prices will curb some of the incentive to reduce driving, but will be balanced by motorist’s fears for their economic future and course of business activity in determining whether US consumption continues to fall or rebounds.

OPEC has become accustomed to and in some cases dependent on much higher oil revenues. As the cartel did two years ago, members (read Saudi Arabia) certainly have the ability to cut production sufficiently not only to prevent a collapse of oil prices but to drive them higher. Most forecasters are projecting a smaller increase in world oil consumption this year and next, but so far nobody seems to be talking about an actual decrease in demand.

We are already receiving scattered reports of cutbacks in oil shipments during the last few weeks in line with the OPEC decision to reduce supplies by some 500,000 b/d. The next OPEC meeting is scheduled for December 17th in Algeria, but pressure seems to be mounting for a special meeting in Vienna on November 18th to discuss the financial crisis and perhaps change output quotas.