Oil Prices Drop, and a New Reason Emerges

The price of oil has been steadily declining in recent months. A barrel of crude can now be had for around $50, a 35 percent drop from the peak last July. One reason for cheaper oil is a surprising drop in consumption last year by the major industrialized nations.

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Crude oil prices bounced back today after briefly falling below $50 a barrel yesterday. Oil prices are still about 15 percent lower than they were at the beginning of the year and more than 30 percent below last summer's peak. There are also signs that last year's high prices cut into demand for oil products, both in the U.S. and other industrial countries.

NPR's Scott Horsley reports.

SCOTT HORSLEY: For some time now, economists have been asking how high oil prices could go before consumers would start cutting back. 2006 may have provided the answer. The American Petroleum Institute says demand for oil in the U.S. last year slipped by just over one percent. API economist Ron Planting says most of the cuts came on the industrial side.

RON PLANTING: It's been driven a lot by price, which caused airlines to find even more ways to conserve fuel, and also industrial users to switch away from oil towards natural gas, which was less expensive this past year.

HORSLEY: Planting notes that other industrial countries saw a similar drop in demand for oil. According to the International Energy Agency, oil consumption in the developed world fell for the first time in more than 20 years.

PLANTING: It's really the same story. With higher prices, you see people adjusting by finding ways to consume less.

HORSLEY: Despite last year's high prices, though, U.S. drivers continued to burn more gasoline. Even there, the increase was less than one percent, about half the growth rate the country has historically seen. Since last summer's peak though, gasoline prices have tumbled more than 80 cents a gallon. A weekly report from the Energy Department suggest pump prices might fall as low as two dollars a gallon this winter.

Gasoline prices are already that low in Michigan, according to Nancy Cain of that state's AAA.

NANCY CAIN: In Michigan, our motorists are very happy to see prices below two dollars. It's wonderful. Prices have been coming down, and we're seeing it pretty much in every area.

HORSLEY: AAA also found prices averaging below two dollars a gallon today in Missouri and Oklahoma. The Michigan average is just $1.96, although Cain cautions at this time of year, Michigan drivers aren't buying all that much.

CAIN: People right now aren't traveling as much as they will be as we get closer to the spring driving season. It's darker longer this time of year. And as the day starts getting lighters, we do tend to see, you know, gas prices, sometimes, you know, increased a bit.

HORSLEY: Even so, the Energy Department's Michael Berdet, says this summer's gas prices are unlikely to climb as high as they did last year, when the average price nationwide topped three dollars a gallon.

MICHAEL BERDET: Right now, we're looking at a peak, probably more in the $2.50 to $2.60 range. Now, that's not to say that many other things couldn't happen between now and June or July, when we're likely to see the higher price for the summer. But as it stands right now, we don't see this year's peak prices for gasoline getting anywhere near the peaks that we saw in '05 and '06.

HORSLEY: High oil prices not only cut demand, but also help boost production of conventional oil in the lower 48 and alternative fuels like ethanol and biodiesel. Some of the energy savings for more fuel-efficient cars and airplanes, for example, will be long lasting. But just as high prices cause people to use less oil, falling prices may encourage them to use more.

Scott Horsley, NPR News.

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