Why Are Oil Prices Sinking So Quickly?

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Oil prices are down to about $66 a barrel, a huge decrease from the all-time high of $147 in July. Consumption is down globally. People are driving less and the economic meltdown has resulted in factories producing less as well.

MICHELE NORRIS, host:

This is All Things Considered from NPR News. I'm Michele Norris.

MELISSA BLOCK, host:

And I'm Melissa Block. It was another disappointing day on Wall Street as the Dow fell 514 points. In a few minutes, we'll hear from our co-host Robert Siegel, who's in New York this week reporting on the economic downturn. Today, he spoke with the former chairman of the Securities and Exchange Commission William Donaldson about how a lack of regulation helped create the downturn. But first, good news for some consumers.

NORRIS: Oil prices have been falling for weeks now after hitting an all-time high of $147 a barrel back in July. Today, the price of a barrel of crude fell to $66, a 16-month low. NPR's Uri Berliner is here to explain what this all means. Hello.

URI BERLINER: Hello, Michele.

NORRIS: Now, why are oil prices starting to plummet?

BERLINER: Well, in brief, it's the economy. You remember about a year ago, when it seemed the world had an insatiable thirst for oil, it couldn't have enough, you know, factories were going full out, we were driving and traveling. That's all changed a lot, and it's changed pretty dramatically both here in the U.S. and in other counties around the world. Demand for oil has decreased as the economy has slowed.

NORRIS: So, is there some sort of lag time, though, when will we actually start to see the drop in the prices at the pump?

BERLINER: Well, there's some lag time, but gasoline prices have fallen. They were up over $4 a gallon in July. Now, they're under $3. They haven't fallen quite as quickly as crude prices. There are other things that go into the cost of a gallon of gasoline, things like refining costs, taxes, those taxes don't change. So, there is something of a lag time. But, you know, I've been talking to some traders today, and they said don't be surprised if gasoline goes down to $2.50 a gallon.

NORRIS: Good news for people listening in their cars right now.

BERLINER: I guess so, you know.

NORRIS: You know, this isn't labeled as such, but I'm wondering if this is - actually winds up being a form of an economic stimulus to consumers.

BERLINER: Yes, but will it be more than the drag on the economy from this very severe downturn we're going through? And it also depends on who you are. Let's say you're someone who has a job, lucky enough to have a job, they have a long commute, and maybe they live in a cold place where they have high heating bills. Then this drop in oil prices and at the pump is a really good thing for them. They are happy. But if you just got laid off in what looks to be a recession now, the price of gasoline going from $4 to $3 a gallon is probably not going to make you ecstatic because you've got more serious things to worry about.

NORRIS: But if behavior led to the drop in prices, if gas does fall to 2.50 a gallon, it's natural to assume that people might be driving more.

BERLINER: They may, although we have to see. You know, people were pretty shocked at $4 gasoline. They changed their habits. And also, people are becoming more risk-averse . You know, there are real problems in the economy. People are curtailing their credit and their spending, so maybe they'll just continue to buy fuel-efficient vehicles or not drive as much because the economy is not doing so well.

NORRIS: So, if gas prices are coming down and if they continue to fall, what does this mean for the development of alternative fuels, because that did fuel this discussion when we saw those very high gas prices.

BERLINER: Well, it could be a problem. There was a lot of money that went into alternative fuels when oil prices were really high. Part of that was sort of the environmental impulse because it's a good thing to do for the environment, but also there were financial reasons to do it. At $140 a barrel, alternative fuel investments were really good. Now, down, it's around 70. In a short term, it may not be such a good investment so things like biodiesel, ethanol, and some of those other alternative fuels maybe taking something of a hit.

NORRIS: That's NPR's Uri Berliner. Thanks so much.

BERLINER: Thank you, Michele.

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