Pump prices give bit of relief

Lower oil costs hint at recession

By William Ehart, Tom Ramstack and Tim Warren THE WASHINGTON TIMES

Originally published 04:10 a.m., October 12, 2008, updated 04:10 a.m., October 12, 2008

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Americans thirsty for a drop of good economic news have found something they can top off their tanks with: cheaper gas.

Regular unleaded gasoline costs have evaporated in the past three months, and crude oil prices have plunged even more. Motorists are pumped about their new savings.

"It helps me a lot because I commute every day from Baltimore County," said Tom Wingate, an electronics company field-service technician who was filling up his sport utility vehicle Saturday at an Exxon station at New York Avenue and Bladensburg Road Northeast.

Two months ago, he was spending $75 every 2 1/2 days to fill his tank. Now his gasoline bill is running about $55 over the same period.

Crude oil for delivery in November sank to a low of $77.09 a barrel Friday, off 48 percent from its record of $147.27 a barrel in mid-July. At that time, oil tycoon T. Boone Pickens and others expected prices to climb even more. On Sept. 30, with prices dropping, Mr. Pickens predicted oil would not fall much below $100.

Unleaded gasoline sold at a national average of $3.35 a gallon last week, down 18 percent from its July record of $4.11, AAA reported.

Tufts University President Larry Bacow — also an economist, who was filling up at the New York Avenue Exxon Saturday — said, "Oil prices are down for lots of reasons. One reason is that the world is entering a recession."

Demand for oil has been cut by economic weakness and by motorists' reactions to the summer's high prices: They are driving less and taking public transportation more, boosting ridership on Amtrak and Metro.

From November through July, Americans had driven 62.6 billion fewer miles than in the same period a year earlier, said Lon Anderson, spokesman for AAA Mid-Atlantic, citing Transportation Department figures.

"People are avoiding vacations and buying less, so there are fewer trips," Mr. Anderson said. "Nobody thought gas usage would be down as much as it is."

Oil markets also are reacting to growing fears that demand will fall even more. Investors are concerned about a deep global recession, and some forecasters are mentioning the word "depression." The Dow Jones Industrial Average just finished, by some measures, the worst week in its 112-year history, while the Standard & Poor's 500 Stock Index had its biggest weekly drop since 1933.

Other factors in oil's collapse are diminishing inflation expectations (investors often buy oil futures to hedge, or protect, against inflation) and the rising dollar. Since oil is priced in dollars, a stronger greenback reduces the price Americans have to pay for oil. The dollar, after sliding versus the euro for two years, touched a 14-month high against the European currency on Oct. 6 on investor flight to safety.

Opinions vary widely on the impact of speculators — traders who buy and sell oil contracts and have no intention of ever taking delivery of oil.

A study released last month by U.S. Senate backers of a bill to curb speculation concluded that the run-up in crude was caused mostly by speculators, adding as much as $70 to the price of a barrel. The federal Commodities Futures Trading Commission, which is in charge of regulating the market, has maintained that demand is the primary factor, though it has begun to reconsider as it conducts its own probe.

Oil analyst Fadel Gheit of Oppenheimer & Co., who testified before the Senate in September, told Platt's energy newsletter at the time: "The downside risk is huge, huge."

Ailing investment banks are unwinding hedging positions in oil, and pension funds and hedge funds will be hardest hit, he said. Such positions are often taken with large amounts of leverage, or debt, forcing massive selling when the bets go the wrong way. Mr. Gheit called the record prices last summer "a bubble."

Consumers have little sympathy for the oil companies and the speculators.

"I don't know why no one went to the oil companies and asked them to bail out Wall Street instead of us," said Rehva Jones, a D.C. government educational program manager.

But some energy executives are suffering, too. Aubrey McLendon, the well-regarded chief executive officer of natural-gas producer Chesapeake Energy, said last week that he was forced to liquidate "substantially all" of his 33 million company shares because he had bought much of his stake with borrowed money and then got margin calls as his share price tumbled. His shares were worth more than $2 billion a few months ago.

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