Slick deal for consumers

Oil is cheap, lowering prices on products from bread to bowling balls.And it's expected to stay that way.

Sure, it's a tarry, funky-smelling syrup, but crude oil today should still be a winner in consumer "taste tests."

During the past 18 months, the price of oil, the economy's lifeblood, has plunged 40 percent to its lowest level in a quarter century, making this a prime time for consumers.

Cheap crude pulls down prices for gasoline, shoes, bubble gum, even the containers that store last night's leftovers. Indeed, every product in the illustration to the right is affected by oil prices.

Oil accounts for up to half the cost of grain. Low prices let farmers save on everything from fertilizer to fuel.

More broadly, cheap oil has helped drown inflation. And it acts like a strong tonic for economic growth, giving kick to consumers, businesses, and Wall Street.

"It's like a big tax cut," says Nizam Sharief, director of research at Hornsby & Co. in Houston.

Indeed, every penny decline in gasoline saves US consumers $1 billion, says Merrill Lynch.

Few substances have so many uses and so much impact on the family budget and corporate bottom line. Trucking, petrochemical, and airline companies are the biggest winners.

History suggests that the price of oil - now about $13 per barrel - will soon gush skyward. Oil prices plunged to similar levels in 1986, 1988, and 1993. Each time, the price surged, in less than a year, above $20 per barrel.

Indeed, the price of oil might burble up in coming months, prodded by cold weather and passing supply glitches.

But that doesn't bother Windle Rollins, who runs an independent gas station in Moore, Okla. He says he makes 4 or 5 cents a gallons regardless of the price.

And it sure doesn't bother the people who line up at his gas pumps. Low gas prices have become irrelevant to drivers, even to those behind the wheel of gas-hungry sport-utility vehicles.

The price outlook for the year is more of the same. A winsome balance between supply and demand should keep oil prices below the typical range of $18 to $21 a barrel, say analysts.

"This market is so bad I'm not going to specify a bottom price," says George Beranek, analyst with Petroleum Finance Co. in Washington. "It's not calamitous, but we might spend a small period of time at very low prices."

This was not supposed to happen. Back in the 1970s, some of the most revered oil analysts predicted a barrel of "black gold" at $100 or more by 2000.

But supply and demand both went in directions opposite to those anticipated by the petroleum prognosticators.

Some economists believe oil and other commodities signal a global trend of falling prices, or deflation, that began with the East Asia financial crisis.

Indeed, the average inflation rate for the 25 industrialized countries in the Organization for Economic Cooperation and Development (OECD) is at the lowest since the 1960s. (Excluding Turkey's 73 percent inflation, OECD inflation grew at a record low rate of 1.8 percent.)

A broad deflationary tide could hold down oil prices longer than the customary boom/bust cycle - especially in Asia.

Petroleum demand there grew a stunning 8 percent annually before the financial crisis began in July 1997. Demand now idles at less than 3 percent.

Although South Korea and Thailand show signs of revival, Asia's No. 1 economy, Japan, remains flat on its back. Even China, the region's juggernaut, is flagging.

"Asia is the biggest factor," says Mr. Sharief.

"Asian demand is improving a little bit, but it will take another year before we really see much of an increase in oil demand in Asia," says George Gaspar, managing director for petroleum research at Robert W. Baird & Co. in Milwaukee.

Even outside Asia, oil demand seems on the wane. Financial turmoil in Brazil threatens to spread and halt growth in Latin America. Britain and much of Europe are slowing.

Consequently, world demand for oil will grow this year by 1.5 percent, not enough to revive prices, according to the International Energy Agency.

Along with reduced demand, consumers enjoy a supply glut. The Organization of Petroleum Exporting Countries (OPEC), controls much less of the world oil market than it did a quarter century ago - just 40 percent.

Many cartel members - desperate for oil revenues - have ignored agreements to cut production.

"OPEC is becoming increasingly irrelevant at setting oil prices," says Joel Prakken, chairman of Macroeconomic Advisers in St. Louis.

Moreover, new technology promises to expand known reserves, and the US proposed conditions last month for scrapping the ceiling on Iraqi oil sales. Such a move could significantly boost supplies.

Still, many analysts believe oil prices will inevitably rebound with a vengeance.

Eventually, demand will revive, and supply will contract. "It's a self-correcting mechanism," says Angeline Sedita, an industry analyst at A.G. Edwards in St. Louis. "When something is priced so low, why make any more of it?"

You've read  of  free articles. Subscribe to continue.
QR Code to Slick deal for consumers
Read this article in
QR Code to Subscription page
Start your subscription today