Diesel prices may already be slightly below the peak for this price cycle.  The upward push of freight rates on materials costs will begin to ebb in the fall and largely vanish by yearend with small rate rollbacks next year. It will take longer for the impact of energy prices on materials production costs to reverse since these prices never adjusted upward to $147/bbl. oil. Expect price cuts to appear no sooner than next winter, 4-5 months after crude oil prices fall firmly under about $120/bbl.

The positive impact on construction demand will follow the price cuts.  The first impact will be in the residential market.  Gasoline pump prices are already being marked down.  But it will take 3-5 months for this to flow through to a significant improvement in consumer confidence.  The good news comes next to commercial buildings when developers react to an improved consumer market.  Public construction will be the last to feel the positive impact.  Lower oil prices have to stimulate the spending and hiring that eventually leads to rising tax collections.

The three forces that pushed oil prices up have all now reversed. Higher prices and weaker economies have reduced the growth of oil demand and stimulated an increase in oil supplies.  Commodity speculators were net buyers of oil futures contracts for several years but are now retreating in light of the new demand-supply balance and the apparent end to $US depreciation.

This oil price turnabout is not surprising.  It has happened several times since 1973.  Eventually, people always buy less and supply more of any commodity whose price rises relative to other prices. The down phase of the price cycle will be as erratic as the up phase.  At times, crude oil prices will rise, sometimes significantly, for weeks, even a few months.

The turnabout in oil demand comes from the realization of how much oil consumption has already fallen in the US and a turnabout in future consumption expectations parallel to forecasts for slowing world GDP growth. US oil consumption is down 3.4% year to date through June compared to last year.  The Energy Department projects consumption will decline 4.1% in 2008 and 1.4% more in 2009. World consumption growth is also slowing and will slow more.  World GDP growth is expected to dip more than 0.5% this year.

The turnabout in supply is still tentative because much of the weak supply gains recently have been due to always unpredictable weather and political impacts. World production is expected to rise 1.5% this summer from the spring with the scheduled start up or new and (hurricane) repaired oil fields.  This is the fruit of the massive increase in exploration development expenses in the last few years.  Similarly, there will be an increase in the supply of ethanol, bio-diesel and other renewal energy.  More supply is ahead; the number of drilling rigs operating in the US has doubled since 2003.

In the financial markets, the demand for oil futures contracts is now weakening, although the data to confirm this is not yet available. Speculators have held net long positions for several years.  They were net buyers without adding any supply. This was a rational investment strategy.  They bought oil futures, expected to rise, as a hedge against their dollar denominated assets, expected to fall in value. The progressively higher net long position of speculators added marginally to the rising price of oil and was a major contributor to the frequent sharp spikes in oil prices.

Now speculators are losing certainty that the demand-supply balance will push oil prices higher and they are also feel less need to hedge against a declining $US dollar. The exchange value of the dollar has been approximately steady since early March in response to the end of interest rate cuts in the US and the beginning of interest rate reductions by foreign central banks.

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