West Texas Intermediate (WTI) crude oil fell to a low of $88.18 a barrel in electronic trading early Thursday morning, and although it has bounced off that low, the price remains below $89 as we head toward the opening bell. The rising supply and the slack demand have driven the price to levels not seen in nearly 18 months.
The proximate cause of the drop is a reported price drop by Saudi Arabia, which is said to have cut its official selling price to the United States, Europe and Asia. MarketWatch reports that the largest cuts were to prices in Asia, where competition for market share between OPEC nations and Russia fuels the price cuts.
Brent crude futures followed WTI down the chart, dropping nearly $3.00 a barrel to an early morning low of $92.19. The gap between WTI and Brent has closed to around $4 a barrel recently, a far cry from differentials of more than $25 a barrel a few years ago.
While a price below $90 a barrel is good for consumers, it also has a few downsides. The main one is that producers will be forced to cut capital expenditures in order to pay dividends to investors or watch their stock prices drop like a stone. The example of heads rolling in the mining industry when big projects displaced dividends has not been lost of oil company executives.
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Because new cars are far more fuel-efficient than older models, the pace of new car buying in the United States, China and India has kept demand somewhat in check. As crude prices — and ultimately gasoline prices — drop, Americans tend to buy larger, less fuel-efficient vehicles. That tends to drive demand up, and with it prices. If the producers are not producing enough to meet demand, the price skyrockets. This is a corollary of the often-cited formula that the best remedy for high prices is high prices.
Oil companies will begin pressing harder for permission to export crude oil once the November elections are past. Right now, no member of Congress wants to be allied with exporting oil on the chance — no matter how slight — that crude prices might unexpectedly rise and export supporters would end up getting blamed for the higher oil prices.
A crude price of $85 a barrel is likely, and a drop to $80 a barrel is not out of the question. While this will be a welcome change for consumers, the drop will be temporary at best, and when prices bounce back, the bounce will be sharp. It is another case of “Be careful what you wish for.”
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