The Myth About Lower Oil Prices

Oil prices are about $93 now. That is down from well over $100 a quarter ago, but is still not low enough to bolster the economy much. Consumers and many businesses are in too much trouble.

NYMEX crude prices were just above $74 a year ago. The perception that the economy had recovered began to push the price of a barrel higher 10 months ago. The prospect of another economic slowdown brought it down in the summer. Now, China’s economic strength and what seems to be a better economic environment in the U.S. has helped oil prices to rise again.

The movement of crude prices is not just a sign that producers are confused about the economy. It is a signal that refineries will hold the prices for oil, gasoline and petrochemical components as long as they can. That seems like a normal way to make money, from a business standpoint. But a new sharp slowdown in demand because refined product prices have been kept too high for too long would suddenly erode refinery profits. Refiners have to set prices based on what they believe will be the balance of supply and demand a few months from now. It is not much better than a guess.

The economy in the U.S. is slow enough that gas prices should fall, if refiners let them. But gas prices have stopped their recent decline. The price of a gallon of regular has not changed in a month. Refiners are willing to take the chance that the GDP slowdown of the second quarter is over, so Americans can weather high gas prices again. Just as oil prices are not back to $74, the price of gas is not back to the $2.80 level where it was in November of last year.

Many economists believe that the drop in oil prices from above $100 is enough to help stimulate the economy. That assumes that gas and heating oil are low enough for many consumers to afford easily. But the price of crude is still 26% higher than its was a year ago. Gas prices are 23%. higher. That can hardly be described as relief for the many Americans whose finances are already stretched near breaking.

Douglas A. McIntyre