Major stock indexes tumbled Friday as a main crude oil benchmark fell below $60 a barrel to its lowest point since the depths of the Great Recession, leaving stunned analysts looking for a bottom.
With some investors concerned about the energy sector and others taking profits from a high-priced market, the Dow Jones industrial average fell 315.51 points in a finishing touch to the worst week for stocks in three years.
The 1.8% decline to 17,280.83 was the biggest single-day drop since mid-October when fears about European growth dominated investor concerns. Other major indexes in the U.S. and overseas fell similarly.
As it has all week with an unprecedented fall in crude, the energy sector pushed much of the sell-off in U.S. stocks. A Standard & Poor's index of the sector's major companies was down more than 2% on the day, and more than 13% on the year.
The price of a barrel of West Texas Intermediate crude, a key benchmark, fell $2.14 to $57.81. Oil prices have fallen more than 40% this year in what analyst Chris Lafakis at Moody's Analytics called "one of the most unexpected developments of 2014."
Lafakis said about half the plunge can be chalked up to "rampant" crude oil production from the United States and elsewhere, including a surprisingly sharp boost in output from Libya, and continued high production from the Organization of the Petroleum Exporting Countries.
He attributed another big portion to slowing expectations for global demand. On Friday, the International Energy Agency cut its forecast for global oil demand, citing oversupply and weak economies around the world.
The strengthening dollar, which has appreciated about 13% against other currencies this year, also contributed to oil's fall, he said.
Analysts said investors were concerned about the struggles of mainly smaller companies involved in shale oil production.
Shares of Houston's Goodrich Petroleum Corp., involved in shale production in Eastern Louisiana and Southwestern Mississippi, have sunk about 79% in three months. Analysts said many smaller operations have funded their expansion with high-yield debt that is now under pressure.
Still, despite the scary down draft in the Dow, analysts said the drop in oil prices is, on balance, a strong positive for the U.S. economy and for U.S. stocks heading into next year.
Mary Ann Bartels, a chief investment officer at Merrill Lynch, said lower gasoline and heating prices stemming from cheaper oil will provide the biggest boost where the economy needs it most — hard-hit lower-income consumers who have seen the fewest benefits from the economic recovery.
"We think the real story is that [falling oil prices] could add a trillion dollars to the economy," she said.
If the roughly $40 price decline since June is sustained for a full year, the economic effect would be about equivalent to the income tax cuts of 2009 and 2010, or about $120 billion, Lafakis said. Consumers make up about two-thirds of the nation's total economic output, while the oil sector accounts for about 13% of corporate earnings.
One worry about the pace of the oil price declines, analysts said, was trying to determine how low is too low, the point where sinking prices do so much damage to the oil sector that the effects spread to the rest of the economy.
"We haven't seen stabilization," said Randy Frederick, managing director of trading and derivatives for Schwab. "Everyone wants to know how low can it go."
In a note to clients Friday, Jim Ritterbusch, an oil industry analyst in Galena, Ill., said that the price of oil was in "free fall," that a price of $55 a barrel was likely and that the possibility that oil could drop below $50 by the end of the month was "now on the table."
Still, analysts said the benefits to the overall economy far outweigh the risks. Among other things, the price declines will put downward pressure on U.S. inflation, which in turn might allow the Federal Reserve to delay an interest rate hike expected for mid-2015.
Further, Lafakis said, declining prices should lead to lower production, setting the stage for higher prices next year.
For the general markets, analysts said, the effects of lower oil prices on the overall economy will trump problems in the oil patch.
"The big bonus is to the consumer," said Bartels. "How are we going to complain about that?"
In addition to the Dow's fall, the broader S&P 500 index fell 33.00 points, to 2,002.33, or 1.6%; the tech-heavy Nasdaq composite index fell 54.57 points, or 1.2%, to 4,653.60.
In Europe, Britain's FTSE 100 fell 161.07 points, or 2.5%, to 6,300.63, France's CAC 40 fell 116.93 points, or 2.8%, to 4,108.93 and the German DAX fell 267.80 points, or 2.7%, 9,594.73.
Analysts said part of the overseas problem stemmed from concerns about the economies of oil-producing states, especially Russia, a major European trading partner, as the price drop has started to bite its oil-dependent economy and send the ruble tumbling.
Analysts said the oil price decline is also a reflection of worrisome global economic trends as Europe edges toward recession.
Japan entered a recession in the third quarter, and China's growth rate slipped to 7.3% and is expected to slow further next year.