If markets get hit again because the sovereign debt crisis...

If markets get hit again because the sovereign debt crisis worsens in Europe then oil may get down to $35. This happened after the GFC in 2008 but it is likely to be shortlived just as it was then.

Much of today’s oil production is high cost with the marginal cost probably over $50/barrel. You’ve got the Canadian oil sand producers which cost something like $50-60 a barrel. The deep fields offshore Brazil would have a cost of about $50. Even oil alternatives like ethanol and biodiesel are high cost and farmers may switch to other crops if the op stays at $35.

High cost producers can probably ride out a $35 price for a while but over the longer term they will shut-in production and the demand-supply equation will again find the right price. The same thing applies to many commodity markets, eg iron and nickel have a floor price because of high cost producers in China.

I think a fair oil price is $70-$80, which is enough for a decent return but not too much to drag down the world economy. The current price has a bit of speculation in it.