LONDON — Oil prices slumped to multiyear lows on Tuesday after Saudi Arabia cut the price of oil sold to the U.S., a move that is shaking an already volatile market but is likely to give the world economy an unexpected stimulus.
The 25 percent or so slide in oil prices since the summer could boost consumer spending and business investment in economies around the world as fuel bills fall.
But not everyone’s a winner. Oil-producing countries such as Russia and Venezuela, which have high extraction costs and whose budgets rely on assumptions of relatively high energy prices, stand to lose out. And lower prices could eventually slow booming production in the United States, offsetting the benefit of lower energy costs for consumers and businesses.
U.S. oil dropped 2 percent more Tuesday to $77.19 per barrel, at one point falling to $75.84, the lowest level since October 2011. It was trading at $100 a barrel as recently as July. Brent, the international benchmark, declined 2.3 percent to $82.82, having earlier fallen to $82.08, its lowest level in just over four years.
A report by the Oil Price Information Service, an independent gatherer of petroleum data, characterized Tuesday’s oil market moves as a “panic.” “Global traders are in essence voting on a referendum as to whether they believe that a price war is looming among OPEC and non-OPEC producers,” the service reported, “and for the moment, they are casting a ‘yes’ vote for the conflict.”
Consumers are already benefiting. The AAA auto club reported Tuesday that the national average price for a gallon of regular gasoline had dropped to $2.97 ($2.65 in Dallas). That’s down 6 cents from a week ago, 33 cents from a month ago and 28 cents from a year ago. The average household in the U.S. consumes 1,200 gallons of gasoline a year, translating into an annual savings of $120 for every 10-cent-a-gallon drop in price.
Adam Slater, senior economist at Oxford Economics, reckons the recent fall in oil prices, if sustained, could add around 0.4 percent to GDP in the U.S. in two years and a little less in Europe. China, which is the second-largest oil consumer and is on track to become the largest net importer of oil, could see GDP 0.8 percent higher than it otherwise would have been.
“This is similar to a surprise stimulus,” Slater said.
Growing supply
Though a drop in demand is a factor in the price slump amid concerns over global growth, Slater says supply-side factors are having a much bigger impact than in 2008, when demand plummeted as the global economy tanked. The rise of fracking in the U.S., the return of oil output from Iraq and Libya, and Saudi Arabia’s willingness to resist production cuts have combined to weigh on prices.
Saudi Arabia’s price cut Monday for customers in the U.S. has been interpreted as an attempt by the country to maintain its market share in the world’s largest economy against supplies from the likes of Canada, Mexico and Venezuela and U.S. shale oil producers.
Phil Flynn, senior market analyst for the Price Futures Group, said Saudi Arabia’s move was directly aimed at those U.S. producers, which have boosted U.S. oil output to the highest level in decades. As a result, U.S. imports of crude oil from Saudi Arabia dropped to 894,000 barrels a day in August, down from 1.3 million barrels a day in the same month a year earlier.
The Saudis are “threatened by U.S. oil production, and they are acting to try to break the U.S. producers’ back,” Flynn wrote in a daily newsletter to clients.
The price drop reverberated in the U.S. stock market Tuesday. The Dow Jones transportation average touched a high of 8,870.90. Airline stocks such as American Airlines and United Continental gained close to 2 percent. Meanwhile, major oil companies such as Exxon Mobil and Chevron fell about 1 percent, while Continental Resources, which primarily operates in the U.S., fell 7.5 percent.
Hercules Offshore, an operator of shallow-water rigs in the Gulf of Mexico, reported to Texas regulators last week that it would lay off 324 crew workers and pare its operating rigs by four. But that reaction has been the exception in an industry that continues to express confidence that it can expand production by another million barrels of oil a day over the next year. Production in the United States has increased by 70 percent over the last six years, reducing OPEC imports by roughly half.
Among the most optimistic industry voices in recent days has been David Lesar, Halliburton’s chief executive, who insists that the recent drop in oil prices reflects a glut that is merely temporary.
“We believe industry fundamentals suggest that these lower prices are not sustainable,” Lesar said during a recent third-quarter conference call. “We believe that supply and demand will essentially be back in balance in a relatively short period of time.”
What will OPEC do?
Most energy analysts say that growth in U.S. oil production will be seriously affected only if the American benchmark drops to $70 a barrel and stays there for several months. That would force many small operators that borrow heavily to cut back, especially in less productive fields.
Russia and Venezuela are considered particularly vulnerable to a sustained fall in prices as their economies are highly dependent on oil. And because their costs of production are high and baseline budget plans are considered optimistic, analysts say they stand to lose more than, say, the Persian Gulf states.
Lower tax revenue from the fall in prices could derail public finances, potentially prompting government spending cuts or tax increases that can hurt growth.
Where oil prices eventually settle could depend on decisions made at a Nov. 27 OPEC meeting. Venezuela has called for a cut in production to shore up prices, but Saudi Arabia and other influential members have not suggested that that is necessary.
The powerful Saudi oil minister, Ali al-Naimi, has been mostly silent and on vacation over the last month. He is expected to meet with Venezuela’s foreign minister, Rafael Ramirez, this week, and oil traders will be watching closely for hints of any agreement to cut output.
“Everybody is trying to get inside the minds of the Saudi royal family,” said Tom Kloza, global head of energy analysis at the Oil Price Information Service. “They have the power to stabilize the markets, at least temporarily. The silence is being interpreted that they are intent on a production war, but it is incredibly premature to say that.”
The Associated Press,
The New York Times
To post a comment, log into your chosen social network and then add your comment below. Your comments are subject to our Terms of Service and the privacy policy and terms of service of your social network. If you do not want to comment with a social network, please consider writing a letter to the editor.