With cheap oil, relief for economy

But low fuel prices also mean shrinking income for some US allies in antiterror war.

Americans' wallets are going to be fatter, thanks to an old-fashioned price war taking place from the deserts of Saudi Arabia to the Russian oil fields on the Caspian Sea.

Over the past month, the price of crude oil has plunged to a two-year low as oil producers have squabbled over who has to cut production. This battle will mean considerably lower home-heating costs this winter, much cheaper gasoline to drive home for the holidays, and even a big cost saving for the nation's struggling airlines.

"It's good for some businesses, and it will put some money back in consumers' pockets," says Robert Brusca, an economist with Ecobest Consulting in New York. "It's kind of like a tax cut, but by energy use, not income."

No one knows how long the downturned economy could get this boost. Last Wednesday, OPEC, the oil-producing cartel, decided to defer cutting output until January, as long as they could get some production cuts from non-OPEC countries, such as Mexico, Norway, and Russia. So far, Mexico has agreed to lower output by 6 percent, but Russia and Norway are balking. After Russia said it was not prepared for big cuts in its production, oil prices fell again yesterday.

"It's basically a game of chicken - who will blink first?" says Robert Ebel, director of energy and national security at the Center for Strategic and International Studies, a Washington think tank.

Yet this is a game that not everyone is glad to see happening. Many of the oil producers are US allies and have been providing bases for the war against the Taliban. "The US is caught in between: We don't want our economy falling, but we want to be helpful to our friends, many of whom are dependent on oil-derived income and have budgets that are not in good shape," says Mr. Ebel.

Saudi Arabia, for one, has been steadily cutting its oil production in hopes of improving the bottom line. As a result, the US could be the largest oil producer in the world by next year, says Adam Sieminski, an analyst at Deutsche Banc Alex. Brown in Baltimore. "It will be the first time in my memory the US will be the world's largest oil producer," he says.

Even before the latest decline in oil costs, the Energy Information Agency (EIA) estimated that home heating prices would be $300 cheaper, or about 20 to 25 percent lower, this winter. Now, they could be 30 percent lower, if prices don't rebound.

For example, last November, consumers paid $1.53 a gallon for home heating oil. This winter, on average, consumers are paying $1.20 a gallon.

Gasoline prices are also falling, averaging about $1.18 a gallon, compared with $1.35 a gallon only five weeks ago. In some areas, such as Detroit, the price has hit as low as 90 cents a gallon, the lowest level in years.

These figures are mirroring the falling price of crude oil. Yesterday, North Sea crude was selling for about $17 a barrel on the international oil markets. This is down from a high of about $33 a barrel this past January.

Many energy analysts have been predicting oil would trade in a range of $18 to $22 a barrel, depending on economic activity. Now, there are some forecasts for prices to temporarily dip as low as $12 a barrel.

Despite the current low prices, Dave Costello, an analyst with the EIA, expects them to rise by the spring. But, he adds, "the probabilities are good that energy prices will be lower across the board in 2002 than 2001."

This is in marked contrast to last winter, when prices soared after cold weather hit in October and November.

By the beginning of this year, President Clinton was pulling oil out of the Strategic Petroleum Reserve (SPR) in an effort to reduce prices and ensure supplies to the Northeast. Although many economists disliked the effort to interfere with the free market, prices came down.

Now, President Bush is doing the opposite: He's announced the government will add to the SPR by storing oil produced on government property, instead of selling it. Bush says the goal is to rebuild the SPR to 700 million barrels of oil, up from its current level of 545 million barrels. "We are taking steps to make sure the nation is prepared for a serious oil interruption," says Ebel. "Now is the time to add to it, while prices are declining."

While there was some grumbling over this, Democrats last week were complaining more over a Republican move to include the opening of Alaska's Arctic National Wildlife Refuge (ANWR) in the domestic stimulus package. Backers are pushing the measure as a way to cut back on buying oil from the volatile Middle East. But opponents are vowing to fight it even if it means a filibuster.

The volatility of oil prices has also helped to hasten consolidation in the industry. On Sunday, two medium-size companies, Phillips Petroleum and Conoco, agreed to merge in a move that would make the new company the sixth-largest oil producer - and the largest US refiner.

"One [Conoco] is heavy into exploration and production. The other is a top marketer," says Mr. Brusca. "It makes sense to put them together."

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