Is a drop in oil prices good news?

Bob Moon May 19, 2010
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Is a drop in oil prices good news?

Bob Moon May 19, 2010
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TEXT OF STORY

Tess Vigeland: It might be easy to tune out the financial news from Germany today. So what if the German government has slapped a ban on what’s known as “naked short selling” in certain risky financial bets? But the surprise move rattled financial markets around the world, because of the scary signals it seems to send about the economic health of Europe. What’s in it for you? Well, all this could actually bring down the price of gasoline.

We asked our senior business correspondent Bob Moon to connect the dots for us.


BOB MOON: Don’t look now, but if oil prices are suddenly slipping, is that cause for celebration — or worry? Oil analyst Stephen Schork says today’s trading crackdown by Germany only added to already high anxiety.

Stephen Schork: Concerns are that the situation in Europe is much worse than we had been led to believe, and that this could actually spill over.

The cost of a barrel of crude dropped to $68 today, down from its peak for the year of $87 just three weeks ago.

Tom Kloza is chief analyst for the New Jersey-based Oil Price Information Service. He says simply put, the markets are spooked. The same kind of pressures that caused oil prices to plunge two years ago could be playing out again.

Tom Kloza: Clearly, the concern is that we could have another round of demand destruction if the European contagion spreads. And right now, the trade is to get out of oil, to buy dollars, or to buy Treasury bills or something else that’s perceived as a very, very safe haven.

Investors aren’t just worried about their exposure to falling oil prices. They’re also selling off the increasingly shaky euro, and that is causing the value of the dollar to rise. Analyst Stephen Schork points out for now that’s just fine with OPEC nations that get paid in greenbacks.

Schork: This is the perfect scenario for OPEC, where you have a strong dollar, therefore, your revenues are very strong, you are willing to accept lower oil prices.

But there is a downside for one of OPEC’s big customers. European nations would have to shell out more of their less valuable currency for oil, weakening demand. Schork says if the spiral continues, it’s possible oil prices could drop to as low as $40 a barrel.

I’m Bob Moon for Marketplace.

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