What Is the Longer-Term Impact of Weak Oil Prices?

Bad news for oil companies could be good news for commuters and consumers but the longer-term impact of weak oil prices remains a big question mark.

On Thursday, Merrill Lynch warned that the price of oil could dip below $30 per barrel if China gets hit by the global recession and OPEC fails to respond by cutting output. It predicted that crude would average $43 in the first quarter, $45 in the second, and then climb to $56 in the second half of 2009 and $70 in 2010.

This came the same day as Gulf Oil CEO Joe Petrowski told business leaders that oil could dip to $20 and gasoline prices in the U.S. could fall to a buck a gallon early in 2009.

RBOB gasoline futures on the Nymex, which hit a high of $3.63 in July, recently closed at $0.98 – the first time they’ve fallen below a dollar since they began trading in 2006, according to Phil Flynn, analyst for Alaron Trading in Chicago.

“Now it is possible that we will see retail gas prices at some point follow suit,” he said in a report. Recent figures have retail prices at $1.81 per gallon, down $1.25 from a year ago, he added.

If gasoline is to fall another $0.80, Mr. Flynn said it is going to have to start with crude oil, which closed at its lowest level since 2005 this week. U.S. oil demand in November also saw its biggest decline since 1981. “Even if prices fall and gas demand increases, prices of gasoline will not spike like they have in the past,” he added.

Mr. Flynn also cited a Wall Street Journal report that said oil producers have less incentive to invest as their margins get crushed, while Sanford C. Bernstein & Co. puts the industry’s average break-even cost range at $35 to $40 a barrel.

“The danger is that when demand does bounce back, prices will boomerang far higher because the supply cushion has shrunk,” the report said.

Comments

[Pipo]

Oil had its Biggest weekly drop since the Persian Gulf War in 1991. The long term impact will be similar to a large tax cut.

www.oiltradersblog.blo...

2008 Dec 07 12:00 PM

[Joyeb]

Cheaper crude means a blow to recession !
US does not need to contribute to economies of producers such as Saudi Arabia etc,.

2008 Dec 07 01:14 PM

[Alamo]

Both good--and true comments.

We need to use this likely brief fall in gasoline/crude prices to get the nation converted to natural gas as our primary transportation fuel.

Cleaner, cheaper and American. What's wrong with that picture?

I hope that Congress will get it in the undoubted tax payer funding of the Big 3 auto companies.

2008 Dec 07 03:54 PM

[prudentinvestor]

I hope this does not slow down the development of alternative green energy as well as clean coal technologies. Both are needed for long term economic stability as well as a sustainable environment.

2008 Dec 07 04:16 PM

[dieuwer]

Alternative energy will be wiped-out. Why buy an expensive hybrid or electric car if gas is cheap?
The best deal was to buy a SUV mid summer when discounts were high and drive it today. !!

2008 Dec 07 06:26 PM

[Greg Pinelli]

Of course..the ONLY sentence worth reading above is not the authors..it is the LAST one..Prices will indeed boomerang..because, as this hopeless little puff piece fails to recognize, the table is being set for no supply and HUGE demand. Buy USO..buy GLD..buy UNG....

2008 Dec 07 08:25 PM

[NOWHEREMAN]

How much money do you have left to invest or do you invest at all? Buy FCX, Buy, USO, GLD, UNG. At what prices?

A few days ago you said gold could drop below $700 but here you are pushing an ETF which will drop if it does so.

You recommended a slew of Gold/Silver investments involving both physical and stock related that would have taken away over 25% of available cash.

4 or 5 months ago you said BUY CCJ at $28 because it was CHEAP and You were buying it then. The same for PWE. DO you still own them? Should they still be bought now that they have dropped to even more attractive levels? Having lost 50-75% of the initial investment?

If the recommendation goes against you, you never comment on it again. There are no Stop Loss conditions because You Are Always Right.

First its half witts( you don't even know how to spell "halfwit"), now its Puff Piece, It Takes one to know one. IMHO

2008 Dec 07 11:34 PM

[Freedoms Truth]

"I hope this does not slow down the development of alternative green energy"

Phoeey. They are expensive boondoggles! Cut them out and save the money,since we just spent it on bailouts anyway. Meanwhile, lets add an oil tarriff so that the Govt gets a slice of oil prices decline, stabilize consumer price whicl sticking it to OPEC, and use the money to help domestic energy and assist in cutting taxes and deficits elsewhere. Such thinking is beyond the capacity of the tax-and-spenders in DC.

2008 Dec 08 12:53 AM