What a difference a month makes. On July 11, New York’s main crude oil contract was swapping hands for $147.27 a barrel. Today, the same contract is trading at just over $113.50 a barrel.

Meanwhile, the Energy Information Administration says US oil demand during the first half of 2008 saw its biggest decline in 26 years.

What’s in store for crude oil prices now? There are good reasons to believe they will keep coming down, according to Alexander Green at InvestmentU.com.

Alexander says that, barring a major supply disruption, fundamentals suggest that oil will settle at under $100 a barrel. For starters:

• The United States is the world’s largest oil consumer.
• Yet our economy is in the dumps.
• Despite the sharp rise in the price of oil this year, U.S. oil demand is actually down.

The situation is similar in many other parts of the world. The International Energy Agency (IEA), the Paris-based energy watchdog of the world’s richest nations, has lowered its forecast for world oil demand growth by 460,000 barrels a day.

The IEA also sees supply from outside OPEC growing by over a million barrels of crude oil a day, the strongest growth since 2004.

The price of oil always sows the seeds of its own collapse. People say consumers are trapped. But not entirely. We can drive less. We can use mass transit. We can buy more fuel-efficient cars.

Consumers will conserve. More money will be invested in alternative energy sources. Producers, too, will search for and bring to market oil that was once too costly to extract.

Eventually, supply and demand will come back into balance.

Don’t get me wrong. You won’t see $30 oil or $1.50 gas again anytime soon. And probably never.

Two decades ago, the world could pump 15% more oil than it needed. Today that spare capacity has practically vanished. It’s now about 2% beyond the world’s total daily consumption of roughly 85.5 million barrels.

That makes the oil market exquisitely sensitive to rumors of anything that might endanger existing production. A terrorist group in Saudi Arabia or insurgents in remote parts of the Niger Delta could turn the world oil market upside down very quickly. (And send oil to new highs.)

However, energy and oil expert Byron King says crude oil is still double the price of what it was just two years ago. Much of the blame lies with the Fed and its inflationary monetary policy…

The oil run-up was not all just insatiable demand meeting flat supply. I’ve discussed this in other articles. The U.S. dollar has been mismanaged for decades, and thus we live in chronically inflationary times. And couple this with the horrid shenanigans of Wall Street and the overall U.S. banking system in this modern era. Ugh!

Remember how some people used to dismiss the fact that the U.S. was de-industrializing? Remember how some people used to praise the so-called “service economy”? They would say things like, “The U.S. capital markets are the most efficient in the world.”

To which we now reply, “Oh, really?”

How could the U.S. banking and finance system ever have gotten so bad? Don’t we have regulators who are supposed to look over the shoulders of the bankers? Don’t they teach people how to be careful in business schools?

So now we are at the moment of decision. How many billions of dollars does the U.S. banking system have to lose? OK, how many tens of billions? Hundreds of billions? When you add in the toxic derivative instruments, it adds up to trillions of dollars. And it looks like the nation is on the hook for a lot of it.

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Oil Is Running Out… It’s As Simple As That

But that’s not what you hear from so-called experts. If you ask government officials, our intelligence agencies and even powerful Wall Street financiers, they tell you the opposite.

They say the Saudis could quickly double their oil production from the current level if they wanted to. And given a few years, they think the Saudis could produce four times as much oil as they do now.

This is like the Iraqi WMDs all over again. Find out here what you can do about it…

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Where can things go from here, what with all that worthless paper floating around?

I understand that the Fed does not want to raise interest rates. That would just plain hit the economy in the gut with the left fist. The politicians would scream. But when the Fed wimps out, the dollar declines in value. And the cost for foreign imports, such as oil, rises. That hits the economy in the gut with the right fist. One way or the other — a left or a right to the gut — our U.S. economy is getting beat up. I’d prefer it if we just took our own national medicine and stabilized the dollar.

If the dollar stabilizes, oil should level off. And we could see the market begin to recover. So watch the dollar for your signal.

Meanwhile, the gold and precious metals stocks benefited from the declining dollar. Toward the end of June, most gold stocks all had good run-ups as the dollar fell.

Source: How Low Will Oil Go?; Oil’s Big Run Up and Let Down