Falling Oil Prices Means More Cash for Leisure

Jan. 17, 2007 — -- Remember watching and worrying as oil prices climbed higher and higher last summer, with predictions hitting $100 a barrel? Well, the momentum has shifted 180 degrees in the oil market, and the oil producers and dealers are about the only ones complaining now.

"December, we were off by 40 percent," said Scott MacFarlane of MacFarlane Oil, a heating oil company based in Boston. "We could have the weather [at] 10 degrees for the rest of the winter, and we still wouldn't catch up what we lost."

The recent drop in oil prices means a windfall for Northeasterners who filled their furnaces with heating oil and paid record prices for it last year. And the mild winter weather has certainly done its part to bring prices down.

But analysts say warm weather does not account for the pace of the plunge -- a 16 percent drop to $51.35 a barrel for light, sweet crude in the past two weeks.

That is the work of market speculators, such as large hedge funds, which buy and sell oil for quick profit and wield growing influence over the prices consumers pay.

"The speculators were very involved in the market, helping to drive the price up and similarly they've been very involved in helping to drive the price down," said Addison Armstrong, an oil analyst at TFS Energy.

Some analysts believe prices could fall even further. According to Wachovia chief economist John Silvia, "$40 to $45 a barrel is not out of the range of possibility."

And the more they fall, the more consumers benefit -- particularly at the gas pump.

Gas Up for Less, and Spend More on Other Things

The 34 percent decline in the price of crude oil from its peak in July has fueled a 27 percent decline in gasoline prices. The government said the national average for regular unleaded is now $2.23 a gallon, down from more than $3 a gallon last summer.

Boston homeowner Susan Yanofsky said the savings on fuel bills adds up. "It's a few hundred dollars each month, which is substantial," she said. Yanofsky planned to spend some of those savings by eating out more often.

Fred Saltzberg, another New Englander, said lower fuel bills gave him the freedom to turn up the thermostat. "It means we can put the heat up a little bit at night, and we have a little extra money to spend," he said.

"Lower oil prices certainly do have the effect of putting more money in people's pockets," Silvia said, "allowing people to take that money and put it in places where they prefer to spend the money."

Retailers, movie theaters and hotels all stand to gain, as do airlines, whose stocks have soared recently on the parallel drop in jet-fuel prices.

Economists estimated that every $10 drop in the price of oil translated into a half-point boost in the nation's gross domestic product, a boost that was especially welcome now, with the housing market in a slump.

"This is exactly what the doctor ordered," Silvia said. "It provides a huge stimulus to the economy exactly when it needs it."

Oil prices have continued to fall this week despite frigid temperatures around the country, in part because OPEC said it did not plan to cut production despite the big drop in prices.

"Companies and OPEC still make money at $40 to $45 a barrel. They just don't make as much money" as they did when prices were close to $80 a barrel, said Silvia.

But none of the analysts we talked to were prepared to predict that these lower prices would last in the long term. As Armstrong put it, "There's too much uncertainty in the world to keep oil prices flat for very long."