Oil prices drop amid economic turmoil
A motorist reaches for his receipt after pumping gas into his Chevy Suburban at a Shell station in Chicago.
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Stacey Vanek-Smith: In the midst of all of this financial turmoil, the price of oil has dropped dramatically, It's down about 3 percent today to $91 a barrel. That's a seven-month low. So, why is this, and how will it affect the global economy? I thought we'd run that by economist Andrew Hilton. Andrew, why is oil dropping?
Andrew Hilton: I think that the reason that the oil price is off is because people's expectations about global growth have just fallen off a cliff. Global growth was going to be 4.5-5 percent. If it's now going to be 2-2.5 percent, then oil at $120-$130 a barrel was grossly overpriced.
Vanek-Smith: Do you think we'll see the price of oil continue to fall if it becomes evident that the global economies are shrinking.
The price of oil is set by two things. It's set by the real demand and supply situation, and it's also set by speculation. And speculation depends on panic, and people were panicking that the price would go up, so the price went up. People are now panicking that the price will come down, and therefore the price will come down. You tend to over over-correct in this kind of an environment.
Vanek-Smith: What impact will cheaper oil have?
Hilton: There will be a temporary lift in the demand for SUV's, which is to nobody's longer term advantage. In the short term, I think it will not do very much, because it won't really be reflected at the pump. The pump prices will come off say 10 percent, even if the actual crude oil price comes off 20 or 30 percent.
Vanek-Smith: And just one final question: What are you going to be watching over the next couple of weeks? What are you keeping your eye on.
I'm an economist and I'm really worried about the global economy. I'm really worried about the macro-economy in the U.S. and in Europe as well. For a while now, the U.S. has been effectively the locomotive, the last, last locomotive trying to pull the global economy out of recession. I think that the crises of the last week may well be enough to tip the U.S. back into recession. And that's scary.
Vanek-Smith: Andrew Hilton is the director of the Center for the Study of Financial Innovation. Andrew, thank you for talking with me.
Hilton: My pleasure.