Oil Prices, ETFs Hit Low - Now What?

As oil prices drop to their lowest levels in three years, with subsequent lows in oil exchange traded funds (ETFs), the masses may be rejoicing now. But the long-term prospects may not look so welcoming.

Oil prices are floating just below $50 a barrel, nearly $100 per barrel cheaper than its peak in July, according to Economist. Many analysts expect the oil price to drop even further. A recent OPEC emergency gathering failed to agree to cut output quotas.

With oil prices dropping, governments are now cutting interest rates and dealing with deflationary risks,  whereas earlier this year they were struggling with the effects of inflation.

Then there are those who worry about the effects of low oil prices and how rapid recent declines reveals a sharply deteriorating world economy with global demand decreasing as economies stagnates or slows.

During the period of high prices, global appetite for oil and energy was restrained, thus resulting in reduced emissions of greenhouse gases. But when oil becomes cheaper, our society starts to procrastinate in regard to decisions such as investing in alternatives, promoting energy-efficiency and changing consumer behavior. This still does not change the fact that oil will continue to represent a good chunk of global energy needs.

Long-term supply is dependent on investments in oil production and new ways of oil extraction. If prices are low, then the likelihood of such investments is diminished, which could result in future shortages.

Oil today is continuing its downward slide, at $42.24 a barrel. It’s a nearly four-year low, and is 70% off the all-time high of $147.27 reached in July.

A couple of oil ETFs that mirrored the downward spiral of oil prices include:

• United States Oil Fund (USO): down 53.3% year-to-date

• PowerShares DB Oil Fund (DBO): down 45.1% year-to-date

• iPath S&P GSCI Crude Oil Tot Ret Idx ETN (OIL): down 58.7% year-to-date

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