Oil prices skid, lessening worries about inflation
Energy prices are sliding following OPEC's failure last week to reduce crude oil production. The price of a barrel of crude was driven below $15 on New York commodity markets yesterday. The price of West Texas intermediate, the benchmark United States crude, touched as low as $14.90 a barrel before bouncing back to $15.50 by noon. Over three days, oil has plunged $2 a barrel.
The spot, or current, price of oil is becoming more important as more oil contracts are pegged to short-term prices.
The collapse in oil prices is rippling through the economy. On Wall Street, the Dow Jones industrial average is up more than 200 points in the past eight trading sessions.
The falling oil price also triggered a rally in the bond market, driving interest rates down. In Washington, the White House is reevaluating its economic forecast for 1988.
The falling price of oil comes as a welcome holiday gift for the economy as a whole. Donald Ratajczak, an economist at Georgia State University, estimates every $1 decline in the price of oil lowers the inflation rate 0.2 percent.
As a result, Mr. Ratajczak has lowered his inflation forecast for next year by 0.4 percent to 4 percent.
The current slump is reminiscent of the way prices fell in the spring of 1986. Oil oozed to $10 a barrel, cutting the nation's inflation rate dramatically.
For most consumers, the immediate impact will be lower gasoline prices. If oil holds at current levels, or falls further, gasoline prices could fall 7 to 8 cents a gallon over the next few months, estimates Dennis Eklof, director of downstream markets for Energy Research Associates.
The move comes too late to have much of an effect on home heating oil this winter, because oil companies have refined this product from oil bought at higher prices.
With energy prices down, consumers will have more spending money, which could give the economy a little more kick, says economist Dan Mitchell of Consumers for a Sound Economy, a Washington public interest group. ``GNP will be higher than some people expect,'' he says, and ``this could help such segments as the auto industry.''
The fall will also help the US in its battle to lower its trade deficit. Already, economists estimate the lower price will shave at least $5.1 billion annually off the trade deficit, which this year is running at about $170 billion.
For the nation's oil belt, however, the price collapse ``puts the oil industry in cold storage,'' says James McKie, an economics professor at the University of Texas at Austin. Two years ago when the price fell, the unemployment rate in Texas swelled as oil producers laid off workers. Already this is starting to happen again. On Wednesday, Phillips Petroleum Company said it would let go 2,250 employees.
``We're right at the level of what it cost to lift oil,'' says Sen. Don Nickles (R) of Oklahoma, ``and if the oil price goes down any more, we will see a real curtailment in production.'' Senator Nickles says the last industry downturn cost 700,000 barrels a day in domestic production as producers shut down marginal wells. ``I'm concerned we will become dependent on unreliable foreign sources of crude,'' he says.
Lower oil prices will also temporarily stifle oil companies' interest in searching for new oil sources.
``Confidence has been shattered,'' says G. Henry Schuler, a former oil executive who is now at the Center for Strategic and International Studies. ``This lower price affects all energy decisions,'' he says.
The fall may continue for some time, Mr. Eklof predicts, with oil sliding to $12 a barrel. At that price it might appear attractive to big oil buyers, thus stopping the slide. The fall could also be arrested if the Organization of Oil Exporting Countries can convene another meeting and curtail members' production. No such meetings are currently scheduled.
The oil cartel has set production for its members at 16.5 million barrels of crude a day. Actual production, however, is 18 to 18.5 million barrels a day, with such oil-rich countries as the United Arab Emirates and Iraq producing far more than their quotas. ``The market is awash in crude,'' Eklof says.
The OPEC problems, Mr. Schuler says, reflect the lack of leadership of Saudi Arabia, the largest OPEC producer. ``If the Saudis were worried about the oil markets, they could lean on the excess producers,'' he maintains.