Crude Oil and Gas Prices Hit Historic Lows
Prices of crude oil and retail gasoline fell Monday to historic lows, a milestone that signals further woes for the oil industry and oil-producing countries and continuing gains to consumers and the U.S. economy.
Adjusted for inflation, oil and gasoline prices are now at their cheapest levels since the U.S. government began keeping these statistics.
With little prospect that oil and gasoline prices will rise much any time soon, thanks to an inability by the Organization of Petroleum Exporting Countries to agree on new cuts or even to extend cuts the cartel adopted in June, U.S. consumers are enjoying the equivalent of a $160-per-person gift in the form of cheaper oil product purchases in 1998.
And the low energy prices are helping myriad industries that rely on oil and gasoline, such as airlines and trucking, and even manufacturers of products made with petrochemicals, such as Tupperware and toothpaste.
But for oil producers, these rock-bottom prices mean additional painful steps await them as they adjust to what may be a low-price future: cost-cutting, job losses and mergers such as the Exxon-Mobil matchup that is expected to be announced today. California’s small independent producers have been hit particularly hard, and many are shutting down their wells.
“Falling prices have triggered a panic movement to cut costs,” said Antoine Halff of Petroleum Intelligence Weekly, a trade publication.
The price of crude oil hit a 12-year low--and the cheapest price on record when adjusted for inflation--on Monday, closing at $11.22 a barrel on the New York Mercantile Exchange. A year ago, crude oil futures were trading at about $23 a barrel.
Meanwhile, the national average retail price for unleaded regular gasoline was 97.4 cents per gallon, the Energy Information Administration said Monday.
Adjusted for inflation, the average retail price of gasoline has not been lower since 1919, as far back as Energy Department and Bureau of Labor Statistics figures are kept. The inflation-adjusted price of crude also hit a record low point in the agencies’ databases, which go back to 1959.
The pump price, based on a survey of 800 gasoline stations nationwide, fell 1.5 cents from last week’s price of 98.9 cents a gallon, which was also a historic low.
In California, the average price of retail unleaded gasoline was $1.155, down 1/10 of a cent from last week, but up nearly 2 cents from the week before. A year ago, the price was $1.344 a gallon.
The price in California has moved higher in recent weeks “because it can,” said California Energy Commission spokesman Bob Aldrich. Californians use a special cleaner-burning gasoline mandated by law that is more expensive to make and is produced by relatively few refineries, so that small changes in supply and demand keep it on a price trajectory that is separate from national trends, he said.
There isn’t much of a downside in the low oil prices for consumers. And, barring unforeseen foreign calamities that could disrupt supplies, Americans should enjoy savings on gasoline and other petroleum products in the weeks and months to come.
In fact, cheap oil will save U.S. energy consumers about $43 billion this year, or about $160 per person, said Art Smith, chairman of John S. Herold Inc., an oil industry research and consulting firm.
The biggest benefit of lower oil prices is that it keeps inflation down, said Rajeev Dhawan, an economist at the UCLA Anderson Forecast. Many economists believe that each of the nation’s recessions over the last three decades has been brought on by high oil prices.
“We all saw what kind of damage those recessions caused. So what we are seeing is the reverse of that, the good side when oil prices go down, and in that sense it’s good for consumers,” Dhawan said.
Because energy costs account for 30% of manufacturing costs, those savings might ultimately be passed along to consumers in lower prices.
But there are losers in the low oil price scenario. The livelihoods of anyone working in the oil industry--from the well to the gasoline pump--are threatened as companies across the spectrum furiously attempt to cut costs, said Halff of Petroleum Intelligence Weekly.
That’s true especially in California, where the crude oil produced in the state is costly to refine and where competition at the retail level is cutthroat. Crude oil produced in the state’s primary production area of Kern County is heavy in sulfur, making it more costly to refine and leading analysts to expect that many wells will be shut down there in coming weeks.
Companies here have already started to cut jobs to save money. Tosco announced Monday it was cutting back production and jobs at its Avon and Rodeo refineries in the San Francisco area in an effort to become more efficient. Los Angeles-based Atlantic Richfield recently announced plans to lay off 900 employees, and several other large oil companies have followed.
UCLA’s Dhawan also points out that lower oil prices will cause problems in oil-dependent trading partners such as Mexico and Venezuela, which could hurt overseas markets for California goods and services.
The drop in prices could also cause a recurrence of the Russian financial crisis seen in August, which caused reverberations in U.S. financial markets and which precipitated a general loss in confidence in Third World economies, Dhawan said.
“Oil is a vital component, and a lower oil price is typically good for the economic sectors that use energy intensively, like autos and airlines,” Dhawan said. “But it’s not good for countries that export oil, and that can have a negative impact on us. If Mexico doesn’t have enough money, that’s a problem for us.”
Another irony for California crude producers that are losing out is that the oil-for-food deal worked out for Iraq by the United Nations is also helping to keep oil prices down, Halff said. Iraq has the right to produce oil valued at $5 billion over the next six months, and as prices decline, it can produce more to achieve its quota, which works to depress global prices even more.
Falling oil prices ultimately will force down prices of natural gas, which is the source of most U.S. electricity generation.
But electric power customers should not expect any appreciable break in their bills, said Severin Borenstein, a UC Berkeley professor of business economics. That’s because California electricity customers are in the process of helping utilities pay off outmoded facilities, a cost that will outweigh any fuel savings for several years.
Borenstein said he doesn’t foresee crude oil prices rising much in the immediate future because “countries are trying to generate revenue by pumping oil” and because of the failure so far of OPEC members to orchestrate price stabilization.
That became clear Thursday when a Vienna meeting of OPEC’s 11 member countries ended with no agreement to cut production further or even to extend the current production cuts of 2.6 million barrels a day beyond June 1999.
* EXXON-MOBIL DEAL: The oil giants are expected to unveil merger plans today. C1
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Slippery Slope
Fueled by a global glut of oil, prices plunged to historical lows Monday. When adjusted for inflation, oil prices are the lowest since the federal government started tracking its current series of oil prices in 1959. Domestic prices for crude oil adjusted for inflation, in dollars per barrel*:
Monday’s close: $11.22
* In estimated 1998 dollars. Calculated by using gross domestic product implicit price deflators.
Source: Energy Information Administration
****
Powering Down
Plunging oil prices pushed gas prices lower nationwide on Monday. When adjusted for inflation, current gas prices are the lowest posted this century. Gas prices adjusted for inflation since 1919:
Average prices for regular gasoline, per gallon*
1998: $108
* Prices are an average price per gallon for regular leaded gasoline through 1981, switching to an average price per gallon for regular unleaded in 1982, when the U.S. changed the predominant gasoline grade it used.
Source: Energy Information Administration, Bureau of Labor Statistics
