The past two days’ crude-oil price drops, experts say, signal the likelihood of a downward trend for energy prices, as declining jet fuel consumption and a rapidly weakening world economy take a bite out of demand.
In addition, a pledge by OPEC, the Arab-dominated oil cartel, to maintain shipments to the U.S. in the aftermath of last week’s terrorist attacks in New York and Washington has been a prime factor in tamping down prices, according to John Felmy, chief economist for the American Petroleum Institute.
Historically, OPEC–the Organization of Petroleum Exporting Countries–has long seen an interest in preserving its world market and profit margin.
“OPEC is run by well-trained businessmen who understand supply and demand,” Felmy said. “They learned 20 years ago that if they squeezed supplies too tight and ratcheted up prices, they reduced demand and encouraged fuel-switching.”
Hamid Arastoopour, professor of energy, economics and the environment at the Illinois Institute of Technology, agreed, adding: “Throughout history, OPEC has never supported terrorism. People never forget when they are taken advantage of in hard times. It would be extremely bad business for them.”
OPEC supplies 40 percent of the world’s petroleum and 28.5 percent of the U.S. stock.
The second issue driving down prices is the faltering economy and its impact on demand, Felmy said. “If consumers change their purchasing patterns [of all goods], we could all go into recession, both U.S. and worldwide,” Felmy said.
Still, there are limits to the steps OPEC will take to help keep crude oil flowing, according to some analysts.
OPEC is considering–but isn’t likely to approve, experts say–a request by Energy Secretary Spencer Abraham to rescind its Sept. 1 supply reduction, its third cut this year.
“They are more likely to keep their current level of production, watch prices drift down on the back of weak demand and then make adjustments,” said John Kingston, director of global oil for Platts, an energy information service.
Kingston said OPEC would be trying to avoid a repeat of 1998, when the cartel increased production as Asia went into a recession, and the price of crude oil plummeted to $10 a barrel.
Another balm to the market are current wartime scenarios, which seem to make a repeat of the price spikes that occurred during the Persian Gulf war unlikely, analysts said.
Most such scenarios suggest that supply disruptions as a result of military action appear to be unlikely, given that Afghanistan, which U.S. officials have singled out as a possible target, is not an oil-producing nation, said Kyle Cooper, commodities analyst for Salomon Smith Barney in Houston.
“The terrorists do not have people in place to destroy supply for long periods of time,” Cooper said. “Osama bin Laden doesn’t have an army to take over oil wells. …
“There is still a possibility that we could find out that there is a link between the terrorists and Iran or Iraq, which might change things. But that does not appear to be the case now.”
Michelle Michot Foss, director of the University of Houston’s Energy Institute, said: “This is not a situation where there would be a price spike, unless a major supplier went offline. Any pressure on supplies that might come from extended military action will be offset on a one-for-one basis by softening demand,” she said.
Ordinarily, jet fuel makes up roughly 9 percent of U.S. crude oil consumption, according to the Department of Energy. But domestic airlines, which Tuesday were operating at about 65 percent of their former schedules, have announced that they will resume at most 80 percent of their operations.
“We are taking airline traffic out of the equation quite a bit,” Foss said. “Business travel is down, so rental car traffic is down too.”
Overall, the transportation sector accounts for 67 percent of all crude oil consumption in the U.S., according to the DOE.
Tuesday, crude oil prices for the October contract settled at $27.70 a barrel, down $1.11 from Monday’s close. Monday, the same contract closed at $28.81, down 72 cents from Friday’s close.
