Unless someone is controlling production and price, strong upward moves in price, followed by strong downward movement in price is typical of any extraction industry UNLESS someone is controlling production to keep prices steady.
Standard Oil provided that control through its monopoly of oil from the 1860s to 1912 (When Standard Oil was broken up AND just before the huge oil findings in Texas).
From the 1930s till 1969, world wide oil prices were set by the Texas Railroad Commission, which had the power to restrict how much oil could be produced in Texas. In 1969, for the first time since the WWII, The Texas Railroad Commission permitted full production of Texas oil. This ability to produce more oil then the world could use AND the Commission willingness to restrict production so that the price of oil would stay stable, was the key to the Texas Railroad Commissions ability to set world wide oil prices. Texas ability to produce more oil then it was (do to Restriction imposed by the Texas Railroad commission, made Texas the "Swing producer" of oil. This loss of the ability to control price (i.e. Texas ceased being the "Swing Producer of oil in 1969) by the mean fact Texas Oil production was less then the demand for oil, Texas was no longer the "Swing Producer" of oil;. This lead to the price instability of oil from 1969-1973. Prices went from 25 cents a gallon to 35 cents a gallon BEFORE the oil embargo of 1973 (which saw the priced go to 60-70 cents a gallon).
By the early 1980s, Saudi Arabia and become the new "Swing producer" of oil. Saudi Arabia set the price of oil from the 1980s till about 2000. I remember Thaxter trying to get a larger share of the world wide oil market with her then new North Sea oil production in the mid 1980s. She tried to sell more oil (So she could have the money to break the British Unions, starting with the miners) but finally after a couple of years, Saudi Arabia taught her a lesson, the House of Saud dropped its production of oil so that the world wide price of oil fell below the cost to produce North Sea Oil. This lasted about three months, then Saudi Arabia's production of oil was reduced to a price just above the cost to produce North Sea Oil and Thacher having learned her lesson, matched Saudi Arab's price, and the House of Saud kept the price of oil stable from that point forward (increasing production when the Soviet Union Collapsed along with Russia's oil production and exports, and then decreasing production with the oil crisis of 1997 when do to massive loss of income in the Far East, oil consumption dropped).
The problem is sometime after 2000 (And the best guess in 2005) Saudi Arabia ability to increase production came to an end (Officially no the House of Saud says it can increase production but several oil insiders do not think they can). If that is true then we are returning to oil prices of the 1850s and the 1970s ups and down (With a general push upward) but massive ups and downs in price.
Coal has always had this problem with price no one ever was able to come close to controlling how much coal is and is not produced. Thus you had massive booms and busts (You had similar booms and busts in the oil industry but overall the prices was more stable then coal do to the actions of Standard Oil then the Texas Railroad Commission and finally Saudi Arabia).
Thus with no one able to control production and thus price oil will go from $5 a gallon one year to $2 the following then $6 the following etc.
The present bust is caused by several things hitting at the same time first US oil consumption has been dropping since 2008. Americans used more oil in 2007 then it has since. People are going slower making less trips cutting out vacations etc. All of this has an effect on the price of oil.
Europe does NOT on a pre capital basis used as much oil as the US, but overall its is comparative. The problems with the Euro has lead to a similar drop in European oil consumption.
Thus the price of oil is dropping till it drops so much people start to buy more of it AND marginal wells are shut down do to the cost to produce oil from those wells exceed the price it cost to produce oil from those wells.
Given the above $2.50 sounds like a good bottoming out price. Might go lower, might stay higher, but sooner or later people have to buy oil for the upcoming winter and that will increase demand to push the price upward. Depending on how cold October and November gets will determine how long this drop in price will last. When temperatures start dropping below 50 degree people buy fuel that will provide a bottom for the price to bounce off of.
A side factor is Saudi Arabia has been using its Oil wealth to support the recent revolutions in Libya, Persian Gulf and Syria. Saudi Wealth is also tied in trying to suppress the revolt in Egypt. To do that AND keep its own people from revolting, oil price has to stay up OR if it does not increase oil production so that total revenue will stay what it has been. Thus you have an addition push for lower prices, increase Arabian OIl Production, even at the cost of future production.
It will be interesting how low the price will go and how fast.
By the 1980s, Saudi Arabia had become the new "Swing producer" of oil, like the Texas Railroad
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