What do the rising oil prices mean?

Marketplace Staff Apr 1, 2010

What do the rising oil prices mean?

Marketplace Staff Apr 1, 2010


Kai Ryssdal: Crude oil closed just shy of $85 a barrel today. That’s the highest it has been in a year-and-a-half. On the face of it, rising oil is troubling. Until you realize that maybe one reason people want more oil is because the economy’s getting better. David Kirsch handles oil market intelligence for PFC Energy. David, it’s good to have you with us.

David Kirsch: Thanks a lot.

Ryssdal: Here we are at plus or minus $85 a barrel. It has been characterized the past couple of days as a sweet spot for oil prices, you know. Good enough to stimulate investment, but not so bad it crimps the economy. What do you think?

Kirsch: Yeah, you know, Saudi oil minister Ali Naimi went a little bit further and called it the perfect price a little while ago. And I think to a certain extent there’s a real ring of truth to that. Producers, especially the OPEC producers, are very happy with prices the way they are. And as you say, it doesn’t seem to be causing a lot of problems for consumers, and in fact we had State Department’s lead energy adviser coming out yesterday and echoing OPEC and saying that this is a good price range, it encourages investment, but at the same time it’s also leading to some conservation and investment in alternative energies as well.

Ryssdal: Well, let me ask you this then, though. I mean we’ve got the American summer driving season coming up. The economy is getting slowly better. That’ll increase demand. How long is it going to stay sweet?

Kirsch: You know, I think it’s actually going to be a little bit tough for prices to go much, much higher than where they are now. There’s a little bit of a notion that we should get into maybe the low to mid 90s, sort of a halfway point between the highs and the lows we’ve seen over the last two years. But I think, looking at some of the broader economic conditions, the economy is recovering, but it’s still at a very low level. Unemployment in the United States is still at about 10 percent. And more importantly when we look at the oil market specifically, refineries are not doing very well at all right now. And the reason that I point that out is the refiners are the only ones buying crude oil, and you really want high demand from those refiners to really translate into sustainably higher prices than where you are currently. So I think it’s going to be a tough path to get above the low 90s this year.

Ryssdal: Let’s get it to the consumer level, though. With gas at $85, $90 a barrel, are we safe at $3.50 a gallon a gas?

Kirsch: Yeah, I think that’s what the Department of Energy expectation is, and it’s probably a reasonable estimate for where we’ll see pump prices over the summer. A little bit of a seasonal spike if demand holds up to reasonable levels. It looks like we’ll be somewhat improved against last year. Well off the historic norms that we saw in 2007 and 2006, especially. But a decent performance should give us $3.25, $3.50 at the gallon. It would seem to be reasonable, $4.00 I think is out of the question under the current conditions.

Ryssdal: You mentioned the high of $147 a couple of years ago. Back then everybody was screaming speculators. They’re the ones driving the market, that’s what is happening. Where are they now? Have they just taken the day off?

Kirsch: Well, you know I think you could make a very clear case that there’s still speculators out in the market. And that’s one of the reasons why we’ve come up from the $50 range into the $85 range.

Ryssdal: So this is a little bit more psychology than economics, but is there a consumer confidence factor here? If we’re basically happy and not going crazy spending money on gas and oil at $350 a barrel, does that control oil prices or is it the other way around? Oil prices affect our behavior and our mood.

Kirsch: Oil prices could potentially affect our behavior and our mood. But I think in the current market it’s really going to come the other way around. I think one of the reasons that you are up to $85 a barrel is an expectation of a pretty healthy recovery taking hold.

Ryssdal: David Kirsch. He’s the director of Market Intelligence Services at PFC Energy out in Kansas City. David, thanks a lot.

Kirsch: Thank you.

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