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As oil prices spiraled upwards last spring, the press was full of stories about how high prices could go.  Many thought $200 a barrel or more before the end of the year sounded reasonable. Now the tables have turned and the game has become picking a bottom for 2009. The IEA’s chief economist set the tone by expecting oil to remain under downward pressure next year as a weakening global economy reduces demand.

Various financial institutions are starting to throw around numbers like $40 a barrel either soon or next spring. The Deutsche bank is even talking about $30 a barrel as their “worst case” scenario. Goldman Sachs is saying $50 a barrel for most of 2009 although much of the decline is behind us. Nobody seems to have much faith in OPEC production cuts.

At an average US price of $1.92 a gallon, when adjusted for inflation, gasoline is already well below what it was selling for during the 1930’s depression. US gasoline consumption is down about 2 percent and American consumers are receiving a major economic stimulus through prices that have now dropped more than 50 percent.

The serious problem, of course, is what $30 or $40 oil will do to investment.  There are now daily reports of oil production and refining projects being cancelled due to low prices and lack of capital. The situation can only get worse. While worldwide oil consumption is dropping, it is not dropping as fast as investment in new production seems to be dropping. All this will come to a head in a few short years when serious oil shortages are bound to develop.