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Oil traders believe the price of oil could fall below $40 per barrel by the end of the year. Whoever drove prices up to $147.27 per barrel taught the oil industry a valuable lesson in demand destruction that they should have learned during the oil shocks of the 70s. I can still remember waiting in long lines just to get gas in the late 70s.

After the two oil shocks of the 70s, people did the same thing they are doing now -- bought smaller, more fuel efficient vehicles, thereby reducing demand for many years to come. While there is little doubt in my mind that eventually, as the economic recovery begins to take hold, oil prices will again be driven up to $100 per barrel, it will probably take a few of years.

We'll probably go through a similar cycle as we did in the 70s and 80s. OPEC already is threatening to reduce output. Drilling and exploration projects will be postponed or canceled because the economic incentive to find new oil has been reduced by the prospect of lower gains. Demand will eventually exceed supply as the economy recovers and pressure again is put on available supplies.

Remember, oil is not a renewable source. If the world were smart during this time of lower prices we'd develop alternatives to this nonrenewable source, but I doubt we will. And so, before we know it, oil will again climb to new heights and help cause the same economic destruction it did this time. But the next time, it might actually hit $200 per barrel and create even more havoc on the economic markets.

Lita Epstein has written more than 25 books including the "Complete Idiot's Guide to the Politics of Oil."

Could oil go as low as $40? originally appeared on BloggingStocks on Thu, 04 Dec 2008 11:33:00 EST. Please see our terms for use of feeds.

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