Lowest Since Early 1978 : Oil Futures Prices Slide Below $12

From Associated Press

The main grades of U.S. and British oils fell below $12 a barrel Tuesday, dropping to levels that, if sustained, could make some oil production uneconomical.

In the United States, oil last sold for under $12 a barrel in early 1978. British oil from the North Sea, which began production about 10 years ago, has never sold so low.

Outside the volatile trading of speculative commodity markets and one-time deals, more U.S. oil companies were cutting official prices for the major grade of domestic crude.

Economists at the securities firm Merrill Lynch & Co. said in a weekly commentary that the only effective means of stopping the price slide would be a cutback in supplies.

"Demand will not rise enough to support current prices," the economists said.

OPEC Agreement Elusive

Several members of the Organization of Petroleum Exporting Countries have been trying to persuade colleagues in and out of the cartel to limit production to stabilize markets.

So far, however, such an agreement has been elusive.

Merrill Lynch said pressure for production cutbacks will increase as prices drop to about $12 a barrel, making it uneconomical to operate low-volume wells, extract petroleum from Canadian oil sands or pump oil in remote Arctic and offshore areas.

European traders said Brent crude, the main grade of North Sea oil, for May delivery sold Tuesday for $11.86 a barrel, down 64 cents from Monday and the lowest price since Britain first pumped oil from the North Sea in 1975.

At the start of this year, Brent grade oil was trading for about $26 a barrel.

In the United States, the official price that companies will pay suppliers for West Texas Intermediate crude continued to decline.

Citgo Petroleum, a unit of Southland Corp., announced late Monday that it had dropped West Texas Intermediate to an industry low of $14 a barrel from $15.

"Prices continue to deteriorate at the wholesale product level, and no stability is in sight for crude oil prices worldwide," Ronald Hall, Citgo's president, said in a statement.

Official prices now range from $14 to $19.10 throughout the oil industry in the United States.

Among reductions announced Tuesday, Standard Oil dropped West Texas Intermediate by $1.25 to $18.25 a barrel, Atlantic Richfield cut it by $1 to $17.50 and Unocal and Conoco lowered it by $1 to $16.

After trendless trading for most of the day on the Mercantile Exchange, West Texas Intermediate crude oil staged a late retreat to close at $11.98 a barrel in contracts for April delivery, down 29 cents from Monday's close and 62.2% below the November high of $31.70.

The drop in prices has improved the prospect of non-inflationary economic growth, something that has contributed to a sharp drop in interest rates in U.S. credit markets to levels last seen in 1978.

Improve Profit Margins

But retail prices have not fallen as quickly for refined petroleum products such as gasoline or heating oil.

"The full extent of price declines will not be passed along to consumers, and what is passed along will not come right away," the Merrill Lynch report said.

The economists said refiners will seek to improve their profit margins by keeping some of the savings. They also said refiners would not be able to pass on lower prices immediately because they have not used up more expensive oil that was purchased earlier. It takes about 60 days to run oil inventories through refineries.

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