Cheaper Oil Brings Windfall at Pump
Gasoline hits 95 cents a gallon in Texas. Heating-oil prices are dropping, too.
An unusual confluence of events is pushing oil prices down to their lowest levels in two years, and the effect is rippling through the world's economies.
In the United States and Europe, an abnormally warm winter is creating a backlog of heating oil. In Asia, continued economic woes mean that oil and gas demand for factories and cars is slackening. In the Middle East, the world's main oil cartel has agreed to produce more crude, and in Iraq, oil production may again reach world markets under a United Nations pact - all adding up to a surplus.
The result: a moderating influence on inflation, cheaper home heating oil prices for American consumers, and less money being put out at the filling pump.
"I think it's great," enthuses Joe Flores, gassing up his Dodge Neon at a station in Austin, Texas, where unleaded sells for the nostalgic price of 95 cents a gallon. "I'm used to seeing $1.11 and $1.12 for unleaded, but this is amazing."
Over the past two months, the price of West Texas Intermediate crude has dropped from $19 to below $17 per barrel. While this is still above the prices of the late 1980s, analysts say the US may be entering a period of sustained low prices. They expect the current matinee rates to last at least through spring.
For the petroleum industry, this means a drop in profits - something that is causing concern among drillers, refiners, and oil barons from London to Houston. But for the average consumer and the nation's economy, cheap oil is largely a boon.
"On the net, it's a positive for the US," says Cynthia Latta, an economist for Standard & Poors DRI in Lexington, Mass. "There will be more gainers than losers."
Cheaper oil is already helping to keep inflation in check: US Labor Department statistics released yesterday show that wholesale prices in December fell for the ninth month, bringing the drop for all of 1997 to the lowest point since 1986. Gasoline prices at year's end were 15 percent lower than a year ago. Fuel oil was off nearly 22 percent.
Lower petroleum prices may also offset the higher wage costs that many companies have incurred during the tight labor market. With inflation under control, the Federal Reserve will be more inclined to cut interest rates, if the economy shows signs of slowing.
"We are expecting the Fed to cut rates by the middle of this year," Ms. Latta says, "but they could decide to cut rates even before that, if there is enough impact from this Asian slowdown."
Needless to say, oil industry executives greet all this economic happy talk like Scrooge at a Christmas party. In fact, while some New Englanders have been breaking out their shorts and sandals in recent 50-degree weather, many in the energy industry are hoping for a headstrong cold front.
"We could get a cold snap - the oil industry needs it to take the inventory off their hands," says Kevin Lindemayer, an energy analyst at Cambridge Energy Research Associates in Cambridge, Mass. "But at this point, we're going to end the winter with a whole lot of excess oil."
Usually, the oil industry can absorb minor price fluctuations for crude, and consumers barely notice a difference in their fuel bills. But the current oil glut has come at a time when oil refiners and distributors are least prepared to deal with it.
"US refiners are in the middle of a major turnaround in inventory," says Larry Goldstein, president of the Petroleum Industry Research Foundation, a New York think tank.
With refining companies taking nearly 900,000 barrels of refining capacity out of production for maintenance, few are willing to buy some of the excess oil and prop up the price, as they often do. "You play all the fundamentals out, and these low oil prices could last through the spring," he concludes.
While the overall petroleum industry is likely to take a hit from the glut, the hardest-hit sector will be in exploration. Even with new technologies that have cut the cost of production, many exploration companies are likely to wait for crude prices to rebound before drilling another well in the Gulf of Mexico and other regions.
But don't ask Darwin Davis to cry for Mobil, Texaco, and Shell. As the owner of a sporty Nissan 240SX, he's perfectly happy paying less money for the same old gas, even if all the price changes seem a bit inexplicable.
"I always thought they drove the price up during holidays and the summertime," says Mr. Davis, adjusting his sunglasses in the waning hours of a Texas afternoon. "But these days it's come down and it's staying there."
He pauses and grins. "Which is fine with me."