Why are gasoline prices so low? And why do they continue to drop? The recent drop in oil prices has truly been extra-ordinary. Gasoline prices are down almost as spectacularly, and the price of diesel is down is well. If we look at the graph, it doesn't look at all like anything we have seen before. What is happening, and where is this headed?

I am becoming more and more convinced that the drop in gasoline prices has a huge amount to do with all of our credit problems (which in turn are related to limits on the oil supply). These credit problems are causing more and more defaults on debt and more and more bankruptcies. These defaults and bankruptcies have a double impact on oil prices--partly from reduced demand, and partly from distressed sellers disposing of futures contracts at low prices, because they are easy assets to sell.

We often hear that "soon" oil prices will hit a bottom, and start shooting back up again. I am less and less certain that this will be the case. Instead, I am concerned that we may on a relentless path to a point far below the point where energy companies can expect to have any chance of making money. We may be on a path toward more and more bankruptcies and defaults of all types--energy companies, owners of commercial real estate, homeowners, financial institutions, auto makers, airlines, and many more. If this is the case, there will be a huge strain on governments, and some may find it necessary to default on their debt.

In order to ultimately get past this crisis, it may be necessary for governments to establish new currencies in which debt is severely limited, and at the same time unwind the debt in the existing currency. I expect that a huge amount of derivatives of all types will need to disappear as well, so that financial assets start bearing a close relationship to physical resources.

I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil - Alan Greenspan (2007)

The Guardian had an interesting article recently on discussions about exploiting 40 billion barrels of Iraqi oil reserves.

The biggest ever sale of oil assets will take place today, when the Iraqi government puts 40bn barrels of recoverable reserves up for offer in London. BP, Shell and ExxonMobil are all expected to attend a meeting at the Park Lane Hotel in Mayfair with the Iraqi oil minister, Hussein al-Shahristani.

Access is being given to eight fields, representing about 40% of the Middle Eastern nation's reserves, at a time when the country remains under occupation by US and British forces. Two smaller agreements have already been signed with Shell and the China National Petroleum Corporation, but today's sale will ignite arguments over whether the overthrow of Saddam Hussein was a "war for oil" that is now to be consummated by western multinationals seizing control of strategic Iraqi reserves.

The subject of Iraqi oil is one which has fascinated me for a number of years, so in this post I'll outline why I believe that Iraq probably has the world's largest oil reserves - or, as Daniel Yergin once said of the middle east, it is "the greatest single prize in all history" (echoing a similar statement by George Kennan at the end of world war 2).

It gets depressing hearing about our financial problems every day. I am sure a lot of people would rather talk about oil and natural gas, and about better prospects for the future. Improved technology is one factor that might make future production better than the bleak future that most of us are foreseeing today. It might even reduce costs, so that more oil and gas can be produced at the lower prices we are seeing today.

What kinds of technology advances are you hearing about? Which ones really have promise? Which ones will not be hurt too badly by the financial crisis, and in fact, may help production in spite of the crisis?

To get people started, below the fold I quote paragraphs about technologies I have read about, mostly from articles in the Next Generation Oil & Gas Journal.

The credit crunch is already having an impact on energy markets. New projects are harder to fund. Highly leveraged companies are sometimes finding it necessary to shed assets. Some players are finding themselves to be the indirect casualties of other players, like Lehman, that have already failed. Long term, we will probably see consolidation and lower production than would have been the case without the credit crunch. Of course, if there is a major recession, it is possible that we won't need as high production.

In this post, I have tried to bring together some of the impacts of the credit crunch on the energy industry that are already being felt. If you are seeing other impacts, please make note of them in the comments.