“After a year of doom and gloom at the pumps, this is an unexpected bonanza for motorists and consumers.” -John B. Townsend II, AAA Mid-Atlantic‘s manager of public and government affairs.
Oh, how it warms the cockles of one‘s heart - a more than 50% plunge in oil prices in the space of scant four months is wreaking havoc among many of the members of the Organization of Petroleum Exporting Countries (OPEC).
Gone are the snide asides about how wasteful those silly Americans are in terms of energy. Oh, but no one - NO ONE - expected U.S. consumers to react the way they did when oil topped $147 per barrel in July, pushing the price of gasoline above $4 a gallon and diesel well above $5 a gallon. We started driving less - WAY less - and demand for oil started to nosedive. When the financial meltdown on Wall Street kicked in, demand for oil cratered to around $65 a barrel.
The best thing is, Americans are STILL not driving. We‘ve driven 62.6 billion FEWER miles through the first nine months of this year versus 2007 and that trend continues. Gasoline purchases we‘re down 6% last month and oil demand is shrinking so fast that even a 1.5 million barrel per day (b/d) cut in production announced by OPEC last week did ZERO to stem the tide: oil prices still fell $3.39 per barrel right after that announcement.
The plunge in gasoline prices can be attributed to economic uncertainty and a big drop of consumption, as oil traders fret about what a “possible -- or imminent -- recession could mean for petroleum demand,” says John B. Townsend II, AAA Mid-Atlantic‘s manager of public and government affairs.
“The price of crude oil is the single biggest component of retail gas prices, accounting for 72% of the price of gas the first half of 2008,” Townsend noted. “So there‘s no question that as crude prices tumble, gas prices will follow. It could be an unexpected windfall for motorists trying to find any good news in this economic crisis.”
We even get a nice warm plate of schadenfreude to dine on as OPEC nations such as Iran and Venezuela - two countries we rank highly on our enemies‘ list - face some serious fiscal woes despite raking in some serious oil cash over the past year.
According to a nice story in Time magazine, despite the speed of the oil boom, the price crash has jolted OPEC countries, which appear to have assumed that high prices were here to stay. Nigeria and Iran have both set their national budgets according to prices of about $80 a barrel, and Qatar's expectation has been $90 a barrel.
“Producers very quickly got used to $100-plus prices,” Julian Lee, senior energy analyst with the Center for Global Energy Studies in London, told Time‘s reporters. “They thought of it as normal and justified. They seem to have very short memories.”
Several oil analysts -- who predicted earlier this year that oil would reach $200 by year's end -- recently said that oil could drop to $50 a barrel. Francisco Blach, head of commodities research at Merrill Lynch in London, pegged oil at $90/bbl for 2008 last month, but he can easily see $50/bbl if there's a global recession.
According to Ed Leamer, director of the UCLA's Anderson Forecast, the current price slide could drop another $200 billion to $250 billion into consumers' pockets, given that as of the second quarter personal spending for gas fuel oil and other energy was about $442 billion on an annualized basis. “For consumers, its welcome relief,” he explained to Time. “And because the U.S. is out of its peak summer driving season, there‘s not too much of an incentive to drive a lot more just because gas prices are down.”
All of this is turning the dice up snake eyes for OPEC producers who spent heavily propping up their nations, gambling that oil prices would stay high. For example, according to the Washington Post newspaper, Iran drained much of its rainy day fund to pump up its economy even before oil prices fell. Its foreign exchange reserves fund, which contained about $40 billion when Mahmoud Ahmadinejad was elected president in 2005, may be empty (though HE ain‘t saying) whereas it should be total some $130 billion due to the oil price jump this year.
The Post also noted Venezuela might run a deficit to pay for massive social spending; that Mexico has spent billions of dollars defending the peso; and Russia, Saudi Arabia and the United Arab Emirates are all dipping into their cash hoards to rescue domestic financial institutions.
Now, for sure, pump prices are still way higher than last year [and if Congress really wants to make itself useful, figure out why when oil prices drop more than 50%, the price at the pump only declines some 25% to 33%] and that‘s probably going to be a permanent fact of life from now on. But if we can keep doing what we‘re doing - driving less, using more mass transit, buying more fuel efficient vehicles, further reducing overall energy use - then I think we‘ll set ourselves up for a better future, one for once far less dependent on OPEC.
