Oil price continues to fall, giving boost to economy

Crude in N.Y. reaches 1 1/2 -year low

warm winter, output gains are credited

January 12, 2007|By Robert Manor and Julie Johnsson | Robert Manor and Julie Johnsson,Chicago Tribune

CHICAGO -- Fears of crude oil reaching $100 a barrel are receding, at least for now, as the cost continues to plunge.

Petroleum prices started falling last autumn and have yet to stabilize, bringing cheaper gasoline and a small but welcome boost to the economy.

Warm winter weather in the United States is credited for the latest decrease in the price of crude oil, which has fallen $5 a barrel since the start of the year.

But other, more nuanced factors also are working to push down oil prices that reached a record $78 a barrel in August and caused some to worry about prices hitting triple digits.

The benchmark price of crude oil dropped $2.14 yesterday to settle at $51.88 a barrel on the New York Mercantile Exchange, its lowest point in a year and a half.

Industry analysts say commodity speculators are moving out of the international market for oil, depressing its price as they depart.

A slowing U.S. economy also has dampened demand.

Other factors have been the restoration of natural gas and oil production lost from Hurricane Katrina in 2005 and increased world output of crude.

Motorists have yet to see the full benefit, as gasoline prices traditionally fall much slower than they rise. But a gallon of regular gasoline in the United States sold for an average of $2.281 yesterday, according to the AAA auto club. In September 2005, it hit a record $3.057 a gallon.

The effects of cheaper oil will ripple through the economy in months ahead. Inflation likely will remain restrained, and for some industries, airlines for example, lower fuel costs will bring a financial boon.

Some analysts are saying oil prices could go lower.

"We think the mid-$40s is the long-run price of oil," said Justin Perucki, an equity analyst with Morningstar. "We think prices will continue to slide over the next couple years."

Analysts say warm weather across the country has brought down prices.

During the winter, refiners typically make more heating oil, used mainly in the Northeast, then switch to greater gasoline production in the spring as the summer driving season approaches.

Demand for home heating oil is weak this year, reflected in unusually high inventories of petroleum products.

Phil Flynn, energy analyst for Alaron Trading Corp., thinks hedge funds and speculators ran up the price of oil last year and are getting out now.

"The stock market has been doing pretty darn good. You are seeing money move out of commodities and back into the stock market," Flynn said.

There is evidence to back his observation. This week, ABN Amro Bank noted that prices of other commodities, such as copper, and aluminum, have fallen sharply in recent weeks because speculators were bailing out.

The significance of oil prices is starkly obvious in the airline industry, where jet fuel has overtaken labor as the leading operating expense for most carriers as a record number of passengers take to the skies. That's one of several factors that could make this a banner year for U.S. carriers, analysts say.

After losing money heavily for much of this decade, domestic airlines are poised to earn a cumulative profit of $6 billion in 2007, said Ray Neidl, airline analyst with Calyon Securities, a New York investment bank.

"In the short-term, fuel-cost savings pretty much go straight to the bottom line," said Sanford "Sandy" Rederer, a Virginia airline consultant.

But analysts don't expect the airlines to share their newfound wealth with passengers by lowering airfares during popular travel times. They likely will continue to raise fares during holidays and summer months, when families take to the skies and flights sell out.

"The continued strong demand should allow the airlines to keep testing higher fares," said Roger E.King, senior analyst with CreditSights Ltd.

For motorists, the best may lie ahead. "If crude stays in the mid-$50s, retail [gas] prices will be less in the summer," said David Sykuta, executive director of the Illinois Petroleum Council, which represents the state's refiners.

Sykuta said cheaper oil isn't the only factor that will push down gasoline prices.

"The Europeans are really helping us out," he said. "Their market has switched so heavily to diesel, so we tend to get their gas cheap."

"Retailers are in the business to make money," Sykuta observed. "It's not the United Way."

Robert Manor and Julie Johnsson write for the Chicago Tribune.

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