Oil drop reflects reality of global economy

Traders had driven oil prices up by 30 percent since late June in anticipation of new measures from the world's central banks to boost economic growth. This week they woke up to some cold hard facts: there's no easy fix for the global economy, demand for oil is slowing and there's plenty of supply.

"It was hope versus reality," said Judith Dwarkin, chief energy economist at ITG Investment Research. "It was inevitable."

On Thursday benchmark U.S. crude steadied, slipping just 11 cents to finish at $91.87 per barrel. But it's more than $7 below where it closed last week. For drivers, that should mean lower gasoline prices, although the decline will be tempered by recent shortages in some regions.

Oil is sliding because demand is growing slower than expected. That's because economies around the world are struggling, including the three biggest oil consuming regions: the U.S., China and Europe. When economic growth falters, demand for gasoline, diesel and jet fuel falls as people travel less and ship fewer goods.

In recent years world oil demand has grown about 1.3 percent per year on average. This year and next, though, demand will likely grow closer to 0.8 percent, Dwarkin says.

At the same time, world oil supplies are plentiful. Production in the U.S., Canada, Iraq and Saudi Arabia has increased enough to make up for losses from Iran, Venezuela and elsewhere. The U.S. government reported this week that stocks of oil grew by 8.5 million barrels to 367.6 million barrels, which is 8.4 percent higher than last year.

Investors saw much of this — and still oil soared in August and early September. That's because central banks around the world took measures to reduce borrowing costs in hopes of stimulating their weak economies. When borrowing costs fall, more money is available to invest in assets such as oil and traders expect demand for oil to rise.

Also, continuing tensions in the Middle East raised fears of future supply shortages. Traders bought oil as a safeguard.