Consumer relief as oil prices fall

After more than a year of billfold-emptying increases, the price of oil appears to have peaked.

For almost three weeks, crude-oil prices have tumbled, dropping about $7 from an eyebrow-raising price of $55.67 a barrel. The drop is coming as cold weather begins and should help consumers (even though they will still be paying higher prices than last year).

In fact, the price of oil may stay down for some time since it now appears producers are supplying more crude than demand might warrant. "We don't see them going back up," says Neil Gamson, an energy analyst at the Energy Information Administration (EIA) in Washington.

If oil prices continue to fall, or at least stabilize, it would put more money in the pockets of consumers and businesses. "It increases confidence so consumers and business are more likely to spend money," says Sung Won Sohn, chief economist at Wells Fargo Banks in Minneapolis. "A lower price for oil is a prerequisite for any meaningful increase in economic growth."

As the price of oil increased, Federal Reserve Chairman Alan Greenspan had estimated it shaved about three-quarters of a percentage point off economic growth. Had it continued to rise to $60 a barrel, there were estimates it would have reduced growth by another three-quarters of a point. Each of these reductions in economic activity is the equivalent of 550,000 jobs.

Now, some analysts believe the price of oil will continue to fall. On Wednesday, the International Energy Agency (IEA) said in a monthly report, "Barring any major unforeseen developments, oil markets should continue to ease heading into and out of the winter."

Other analysts say that prices might depend on the weather. "Prices could rise if the winter goes from normal to colder than normal," says Paul Sankey, an analyst at Deutsche Bank in New York.

For now, speculators have lost their bullish enthusiasm. Over the past two weeks, speculative contracts on the New York Mercantile Exchange have been reduced by 75 percent.

"Some are saying oil has the potential to be $40 a barrel [compared with $47.75 yesterday morning] by the end of the month," says John Kilduff of Fimat USA, a commodities broker in New York. That would be far faster than the EIA's forecast, which expects the price of a barrel to fall into the mid-$40s by the end of 2005.

One of the keys to the decline is a better relationship between supply and demand. IEA estimates that OPEC boosted output by 220,000 barrels a day last month to 29.96 million barrels per day. Even in Iraq, oil production from the southern region has become more reliable.

At the same time, production in the Gulf of Mexico has been steadily improving as pipelines and oil platforms have been repaired from hurricane Ivan's damage. "By our data, oil inventories are up 12 million barrels, and a big chunk of that is from restarting Gulf production," says John Felmy, chief economist at the American Petroleum Institute in Washington.

While supply has been increasing, energy experts believe that demand, particularly in China, has been falling in recent months. As evidence, Mr. Kilduff points to a reduction in exports of goods and services from Asia. "[China] was once the engine of demand growth," he says.

Still, oil prices are considerably higher than last year at this time, when they were closer to $30 a barrel. As a result, this week the EIA estimated that heating-oil expenditures by typical Northeastern households will average about 37 percent above last winter. This is up from the agency's estimate last month of 28 percent.

As lower-priced oil becomes available, many consumers are likely to benefit, says John Huber, president of the National Oilheat Research Alliance, which represents oil-heat providers in Washington. He says many consumers, like the oil dealers, have been waiting for the price to fall before filling up. "We can see that in the volume of product moved," he says. "Most consumers won't be buying at peak prices."