This same inelasticity of oil led to a plunge in oil prices, quicker than its meteoric rise. Oil adds utility to all other natural resources — utility of form, place, and time. When economies around the globe began to slow down house prices began their descent to rational levels, stockmarkets crashed, banks collapsed, stores closed, manufacturing tanked, unemployment began to soar, wealth evaporated. As a result of the above, aggregate demand plunged. When folks do not have money to buy products, frivolous or otherwise, the demand for energy and hence crude oil, which converts natural resources into marketable products, will also naturally plunge. Hence, crude oil prices dived. 

To mistake this temporary dive in crude prices as permanent and react by lowering crude distillate prices is short-sighted, to say the least.

Add to this the fact that the IEA has reported in its 2008 Annual Report that the world’s biggest oil fields are declining at a rate of 9 per cent annually. Keep in mind that in 2007, the 20 largest oilfields provided 27 per cent, 19 MBD of global conventional crude. What this implies is that, the 86-MBD supply that we have recently seen is set to go down, as new sources of supply cannot make up this decline in sufficient measure. The absolute kicker in this story is that we don’t know when demand will match supply again. We will only know once we are there, via another explosive rise in oil prices.  

By lowering prices today policymakers have told economic agents: go forth and make merry. We know where this attitude has landed us. Rather, the message that is required in these times, when we are at a plateau in oil extraction and are henceforth going to see only declines, should be one of conservation and energy efficiency. Governments can gather surpluses during such times of low crude prices and high crude derivative prices and use them for better creating and targeting safety nets for the vulnerable. 

... contd.