What's Behind (and Ahead for) the Plunging Price of Oil

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Paul Sancya / AP

Gopesh Patel fills his SUV with gas in Troy, Mich., on Oct. 10

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Another worry is looming for OPEC officials: A possible slowdown in China, whose soaring economy this decade has sent oil prices rocketing, and helped to ignite a scramble for new oil exploration and drilling in numerous developing countries from Ecuador to Angola, whose economies have surged along with the oil prices. "OPEC needs to see China maintain its rate of growth," Robert Johnston, energy director for the Eurasia Group in Washington said before the OPEC meeting. Without China's continued thirst for new oil, OPEC production cuts will have a limited impact.

If demand for oil is off 10% worldwide, why are prices down more than 50%? It's not a one to one relationship — small demand swings can cause large price swings, says Blanch. And the unraveling of oil is the other side of the credit crunch. Banks, investment banks and speculators have pulled money out of oil futures, further driving oil prices down; that's one reason why prices have fallen far faster than demand.

Despite the speed of the oil boom, the price crash has jolted OPEC countries, which appear to have assumed that high prices were here to stay. Nigeria and Iran have both set their national budgets according to prices of about $80 a barrel, and Qatar's expectation has been $90 a barrel. "Producers very quickly got used to $100-plus prices," says Lee. "They thought of it as normal and justified. They seem to have very short memories."

Several oil analysts — who predicted earlier this year that oil would reach $200 by year's end — have recently said that oil could drop to $50 a barrel. Merrill's Blanch had oil pegged at $90/bbl for 2008 last month, but he can easily see $50/bbl if there's a global recession. That could be more welcome news for drivers next year. "That's where you could see people use that disposable income to do things like go on vacation," says Medlock. That's assuming they have a job to get away from. But one thing low oil prices can't do is get the U.S. out of its credit crisis.

(Click here for a Gallery of 10 Things to Like About $4 Gas.)

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