How low will oil go?

Marketplace Staff Sep 21, 2006
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How low will oil go?

Marketplace Staff Sep 21, 2006
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TEXT OF INTERVIEW

SCOTT JAGOW: The price of oil climbed about 30 cents today to $61 a barrel, but it’s fallen $4 in the last two days and it’s down $16 from where it was two months ago. I’m sure you’ve noticed at the gas station. Quite a few reasons for the drop, but the main thing is: No news is good news. Chris Farrell is our economics correspondent.

CHRIS FARRELL: I mean one way of looking at the oil market is that if you simply focus on the fundamentals, supply and demand, James Paulson he’s an economist and he’s of Wells Capital Management, he estimates that on a supply-demand basis the price of oil should be around $50 a barrel. There’s a $15 geopolitical risk premium in the oil market. And since we haven’t had a lot of terribly bad news, so we’re seeing the risk premium disappear, and that is showing up in lower oil prices and lower gasoline prices.

JAGOW: So how far down do you think oil prices will go?

FARRELL: Well Paulson puts it at $50. I think there’s a caveat we have to throw out there and that is: What will OPEC do? Because OPEC has increased power in the oil market today. OPEC seems to be saying we’re going to fight a price decline below $60 a barrel. They probably won’t be able to hold it necessarily at $60 a barrel but I would expect that’s where the struggle really will be and what we’ll see is a battle around the $60 a barrel mark, sometimes going below, sometimes going above, but on the fundamentals very, very hard to create a case that says below $50 a barrel.

JAGOW: It looks like the housing market might start battering the economy overall. How does lower oil prices affect the economy overall?

FARRELL: Well I think it’s basically good news. Oil is the unusual commodity. It’s what we need to sustain our economic growth. Now, remember, let’s just say it goes to a price range of $50-$60 a barrel. I mean that’s still high, we’re not talking about going back to the $30 and below range that we had several years ago. But at that price it will provide goose to the economy. I think the bigger impact will be on the gasoline market. I was reading a nice analysis by James Hamilton, an economist at University of California San Diego, and he’s arguing that we’re going to see gas prices of around $2.20. Now for every dime drop in the price of gasoline, that adds about $40 million a day into consumer pockets. So obviously that has to be good, has to help consumer confidence. And it will also, and this may be the most important effect, it will give a little bit of comfort to the Federal Reserve to continue to not be aggressive about hiking its benchmark interest rate. So it has to give some reassurance to the Federal Reserve board.

JAGOW: Alright Chris thanks a lot.

FARRELL: Thank you.

JAGOW: Chris Farrell is the Marketplace Economics Correspondent. In Los Angeles, I’m Scott Jagow. Thanks for listening in and have a great day.

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