Lower demand helps in oil-price drop

Oil rigs in Culver City, Calif.


KAI RYSSDAL: First things first as we get going today. The Fed did nothing on interest rates. The short term Federal Funds rate stays at 2 percent. Energy-based inflation's still a worry. Bernanke said he's going to keep an eye on it.

If he was watching today, he saw oil close below $120 a barrel for the first time in a couple of months. Whether that'll last or not is why we've called Peter Beutel. He runs the consulting firm Cameron Hanover.

Peter, welcome to the program.

PETER BEUTEL: Thank you.

RYSSDAL: So, here we sit, down 20 percent in the price of a barrel of crude oil in about three weeks. What gives?

BEUTEL: Well, it's been demand destruction. The curious thing here is that the consumer has had a lot more power than he or she were aware that they did have. Demand for gasoline, which is the main item which is produced by crude oil and the biggest item that we use here in the U.S. . . . Gasoline demand is down between 2.2 and 4.1 percent, depending on which source or aggregate one uses. But that's been enough to pull gasoline prices down almost 75 cents a gallon.

RYSSDAL: What about things like speculation and the role of supply shortages? Are you buying any of that?

BEUTEL: Well, it wasn't traditional speculation by regular commodities speculators that pushed prices higher. It was really refugees from stocks and bonds that came into the market last August and September when Ben Bernanke tipped his hand and let everybody know that he was going to cut interest rates. That, in turn, put pressure on the dollar, and we saw a huge amount of new buying come into the market in September last year that was from investment money. Some of those people may have been getting out recently, particularly because the dollar has been steadying recently.

RYSSDAL: Do you put much stock in the price of oil as an indicator of recession?

BEUTEL: I actually do think the oil market is a very good indicator of future economic activity. And I think that it is telling us right now that we're headed into recession.

RYSSDAL: So, where do we go from here? Is this going to last -- $118 a barrel?

BEUTEL: Well, there are three major wild cards that could push prices right back up: If we were to have a hurricane like Rita or Katrina; If we were to see the Straits of Hormuz blocked because of various events going on with Iran and its nuclear program; the third thing is if Ben Bernanke starts talking about cutting interest rates or if Jean-Claude Trichet, his counterpart at the European Central Bank starts talking about raising rates in Europe, then we're going to see the dollar under pressure. And that could take away a lot of the inroads that we have made into prices. If we can make it through Columbus Day or so without a problem at the Straits of Hormuz, without a hurricane like Rita or Katrina, then I think there's a very good chance we'll be looking at crude oil right around $100.

RYSSDAL: We're closer to $100 right now than we are to $150. Is that your prognostication here?

BEUTEL: Well, my feeling is here that, you know, there are still plenty of factors that could turn this back into a bull market, at almost the drop of a hat. But, provided we don't see one of the three things that I've outlined, then I think that we are in the beginnings of a more-bearish and balanced market. And I think it's a market that can go lower.

RYSSDAL: Peter Beutel, at Cameron Hanover in New Canaan, Connecticut. Peter, thanks a lot.

BEUTEL: Thank you.

About the author

Kai Ryssdal is the host and senior editor of Marketplace, the most widely heard program on business and the economy in the country.


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