Living In an Era Of Low Gas Prices

Consumers, airlines, and factories welcome 89 cents a gallon fuel. How long will it last?

At the Red McCombs Chevrolet dealership in Austin, John Depperschmidt and his sales crew are selling gargantuan Suburbans, Tahoes, and full-size pickups as soon as they arrive from the factory. Corvette buyers face a six-month wait.

But no matter how many extra cup holders and cash rebates he throws in, Mr. Depperschmidt can't move the perky little Geo Metros. "We offer these smaller cars, but that doesn't seem to be what people want," he says with a sigh. "Gas mileage just isn't a pressing question anymore."

Granted, Texans have always loved their trucks, but across the nation Americans are buying gas-guzzlers. Factories, airlines, and trucking companies are enjoying lower fuel costs and boosting their profits.

It's as if America had turned the clock back on gasoline prices, and in a way, it has. Prices at the pump are at an all-time low, when adjusted for inflation. Crude oil prices have fallen 34 percent in the past six months, from $19.50 in October to $14.50 this week for a barrel of West Texas Intermediate. Analysts say cheap petroleum could be a fact of life for months, maybe even years.

"The market is so weak right now, I think prices could go even lower, maybe below $12 a barrel," says Mohammad Abduljabbar, a senior economist with Petroleum Finance Co., in Washington. "You can drive very long this summer and enjoy your vacation."

The main driver of cheap fuel is overproduction by some of the world's largest oil producers. Last December, the Organization of Petroleum Exporting Countries (OPEC), which includes Venezuela and Saudi Arabia, agreed to increase production by 10 percent. Even so, the Venezuelans and Saudis are not sticking to even these higher quotas. An emergency OPEC meeting called for March 16 is unlikely to resolve the oil glut; Venezuela's minister doesn't plan to attend.

"There's a titanic battle going on right now," says Sarah Emerson, director of Energy Security Analysis Inc., a Boston-based firm. "At the December meeting, Saudi Arabia basically said, 'we are not going to cut production until they [Venezuela] do, and Venezuela said, 'we won't cut production, not one barrel."

Every good OPEC nation would prefer higher oil prices - and thus higher profit margins - but few producers are willing to cut production unless everyone else does, says Ms. Emerson. "I think that sounds like a market-share war, don't you?"

In addition to this sandbox squabble over supply, there has been an unexpected fall in demand. In America and Europe, an unusually warm winter has found homeowners and businesses buying less heating oil.

In Asia, a financial crisis has slowed fuel consumption in what was once the fastest-growing oil market in the world. Even when Americans hit the road for vacations this summer, they are unlikely to use up this excess oil.

89 cents and counting

For consumers, this new oil market is a boon. The average price for regular gasoline is down to to $1.02 a gallon this week, according to the latest US Department of Energy survey. In many places, like Texas, 89 cents a gallon is common. That means truckers, bus companies, and ordinary car owners are heading out on the highway with an extra jingle in their pockets. Even the hapless airline industry, still recovering after a spate of airfare wars, is starting to see a silver lining among the economic clouds.

"When we pull up at the pump, our prices are better than they were a couple of months ago," says Tim Smith, spokesman for American Airlines in Fort Worth, Texas. Since the airline buys $2 billion of jet fuel each year, every penny change in the price of fuel means $28 million to $30 million a year, he says. If prices remain at the current level, American could expect a $350 million to $400 million windfall.

But don't expect a sudden drop in air fares. The main costs for American Airlines - salaries and benefits - continue to rise. In addition, most airlines seem to be filling their planes without price incentives.

"We can't point to any overwhelming evidence that airlines seek to stimulate demand by passing on the benefits" of cheaper fuel, says Samuel Buttrick, an airline analyst with Paine Webber. "On balance, their operating philosophy is higher fares are better."

While cheap petroleum is good news for much of the US business sector, it is bad news for the oil industry, much of which was just starting to rebound. Hardest hit are small oil-drilling companies and the entrepreneurial wildcatters who suddenly can't sell Wall Street on a promising new field.

Surviving the slide

Even so, today's oil industry has come a long way from the last oil-price crash in 1986, when Mideast overproduction brought the price of a barrel of crude oil down from $35 to $10 overnight. In fact, with new technology, such as horizontal drilling, some larger oil companies like Shell, Mobil, and Texaco are ignoring the dip in prices and pressing ahead with long-term exploration.

This is good news for Diamond Offshore Drilling in Houston, which unlike many oil service companies, has managed to weather today's stormy market.

With specialized rigs that can drill in mile-deep waters, Diamond is keeping busy even as its shallow-water competitors are closing up shop. "In deep water, the finds are so much larger, so they [our clients] are making money even at these prices," says Caren Steffes, manager of investor relations for Diamond Offshore. "Even $10 a barrel is profitable for them in deep water."

But Wall Street doesn't distinguish the winners from the losers in the oil industry, Ms. Steffes adds, and Diamond Offshores stock prices have tumbled from a $66 high point in November to $40 today.

So how long will this period of cheap petroleum last? Industry experts say the answer will largely depend on when OPEC nations, particularly those in the Persian Gulf region, start to feel the lost revenues and mounting budget deficits. The next clue may come in June, when OPEC nations have their next meeting.

"There's enough supply at this point to drive it down to $5 a barrel," says Ken Miller, a senior partner at Purvin & Gertz, a Houston based oil consulting firm. "We feel that prices are at such a low level now that there will be some activity in the OPEC nations, perhaps by the June meeting."

* Monitor staff writer Kristina Lanier contributed to this report.

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