Oil Up, Dow Down

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The price of oil shot up by $10 — a single-day record — helping send the Dow Jones Industrial Average down nearly 400 points Friday after a weak employment report. What do skyrocketing oil prices and the plunging stocks market mean for the economy?

SCOTT SIMON, host:

This is Weekend Edition from NPR News. I'm Scott Simon. Coming up, a U.N. envoy who's in the United States to look at racism. But first, huge swings in the oil and stock markets yesterday and in opposite directions. Crude oil prices soared more than 10 dollars a barrel to a new all-time high, while the stock market tumbled nearly 400 points.

That's no coincidence. The spike in oil prices rattled the stock market, as did a weak jobs report. NPR's Scott Horsley joins us. Scott, thanks for being with us.

SCOTT HORSLEY: Good to be with you.

SIMON: The last couple of weeks, it looked as if there might be at least a small break from record oil prices, but apparently not.

HORSLEY: No, they have come roaring back. Yesterday's 10 dollar gain was the biggest single-day jump in oil prices in history. It was about double the old record, which had lasted all of a day. Oil prices had jumped about five dollars a barrel on Thursday.

Of course, most of us don't buy oil by the barrel, but that 10-dollar gain yesterday translates, if it's passed along, to about 25 extra cents on every gallon of gasoline, every gallon of diesel fuel, and we were already looking at gasoline prices. Nationwide, they were averaging about four dollars a gallon. Diesel prices in California are around five dollars a gallon.

SIMON: Remind us, trace through once again maybe, if you can, the ways in which increase in oil prices affect the entire economy.

HORSLEY: Well, we are already seeing signs that drivers have begun buying less gasoline, and that's something we don't ordinarily see. Drivers are very resilient, but they're cutting back, trying to save money. We've seen airlines canceling flights, parking some of their older jets as they try to save on fuel.

Economists call this "demand destruction." But one analyst I talked to said, if you are talking about the airlines, it's really more like "industry destruction." They were already hurting badly, and this extra 10 dollars is just salt in the wounds.

Drivers, truckers, airlines - anybody who uses fuel was feeling the pinch of high oil prices, and this is just going to add to that. At the same time, we have seen a slowing in the economy. That new jobs report you mentioned showed the country lost nearly 50,000 jobs last month. The unemployment rate jumped from five to five and a half percent, the biggest jump since 1986. Ordinarily, you would think that this would put the breaks on skyrocketing oil prices.

SIMON: Because ordinarily, you would think that any lessing of demand would have to bring down the oil price.

HORSLEY: That's what they taught us in economics, right? If demand shrinks, the price should eventually catch up. And that should happen eventually, but the weak economy is also causing some other things to happen. For one, it's forcing the Federal Reserve to keep interest rates low, and that means the dollar has been very weak.

There's been no chance to prop up the dollar, and because oil is priced in dollars, if the dollar is worth less, the producers of oil demand more dollars for every barrel they pump. In addition, as the dollar weakens, investors don't want to hold dollars, they want to hold something more secure. So investors have been pouring their money into the oil market.

The other thing that's happening is investors are just betting that the price of oil is going to go even higher, and they got some reassurance yesterday, when the investment bank Morgan Stanley offered a forecast that oil prices could climb to 150 dollars by the fourth of July. That was reason enough for investors to ignore some of these other worrying signs in the economy and to just place a bet that what's high today, maybe even higher next week.

SIMON: NPR's Scott Horsley, thanks very much.

HORSLEY: My pleasure, Scott.

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