Price Of Oil Drops To $40 A Barrel, Despite Predictions It Would Rise
ROBERT SIEGEL, HOST:
The price of oil is now at a six-and-a-half year low, right around $40 a barrel. To put that in perspective, back in 2008, it was over $140 a barrel. Well, if oil is the lifeblood of the economy, then when, if ever, will the price decline flow down through the economy's capillaries into stores and supermarkets and household budgets? Well, Jason Bordoff, the director of Columbia University Center on Global Energy Policy, has written about the causes and consequences of declines in the price of oil, and he joins us now. Professor Bordoff, welcome to the program.
JASON BORDOFF: Thank you for having me.
SIEGEL: Gasoline prices are low, but should we also expect, say, airline tickets to get cheaper because the price of oil is so low?
BORDOFF: Well, airline tickets in particular are notoriously sticky. They tend to go up much faster than they come down. Airlines also hedge their prices. They buy fuel in advance at a fixed-price. So the price decline has not been as steep for airlines as it has for consumers at the gasoline pump. But we will see the oil price decline translate into lots of other savings for consumers, not just obviously at the pump, which is the most obvious, but agriculture is quite energy intensive, so we should expect food prices to come down. And, you know, we should remember, for example, in the Northeast, a lot of people still use heating oil to heat their homes in the winter. As we head into the winter months, that's extra money in their pockets.
SIEGEL: But so much in our country is transported by truck - you mentioned food. I mean, should we expect chickens and the refrigerators that we put the chickens in to all be cheaper sometime this year?
BORDOFF: Yeah, as you said, I mean, so much of our economy depends on the price of energy, and as oil and gas prices decline, that's going to help manufacturing. That's going to help the petrochemical sector, and all those prices trickle down to consumers. There's some lag, it takes time, but this will mean lower prices for consumers for all sorts of goods and services. And then most especially just economic stimulus - a tax cut, money in their pockets in terms of reduced spending at the pump.
SIEGEL: Could Saudi Arabia, if it chose to pump less oil, send the price right back up or is there something about the world market right now that would hold it down?
BORDOFF: They certainly could. They'd have to cut production a lot, you know, somewhere around 2 million or more barrels per day. But to the extent you pull supply off the market, you'd certainly push prices back up - not back up over $100 where the prices were last year and for a few years before that, but it would go back up.
The causes of the oil price decline so far have been partly driven by a weakness in demand. We saw very bad manufacturing numbers, for example, come out of China just today. And then on the supply side, the Saudis are pumping at a very high level. The United States continues to produce a lot of oil, even at a low price, more so than people thought we could in the shale space. And then we have a nuclear deal with Iran, so Iran will be pumping more oil soon. Russia, Iraq - all these countries have increased production, not reduced it, even with a lower price.
SIEGEL: In terms of the U.S. economy and its growth and recovery, are low oil prices good or are oil prices that are too low bad? What would you say?
BORDOFF: Well, on that, low oil prices are a boost to the U.S. economy. They're like economic stimulus, a tax cut that puts money in people's pocket. We haven't seen consumers spend the savings from gasoline as much as some people might have thought - maybe because they're nervous about the future of the economy. They're saving a lot more of that money, not spending it. And it's also less of a positive today than it would've been, say, five or six years ago because the U.S. is such a larger producer of oil that the low prices are good news for most people, but, you know, if you're in an oil-producing state like Texas, North Dakota, Oklahoma - those states have gotten hit particularly hard by reduced spending in the oil sector.
SIEGEL: As you say, some states in the U.S. are oil producers and therefore they are hurt by low oil prices. Globally, the Saudis seem to be able to afford to keep on pumping a lot of oil at a lower price per barrel. Which countries are likely to be most harmed by this?
BORDOFF: Well, even the Saudis have been harmed in the sense that they've had to issue bonds, raise debt and dig deeply into their savings. They just have a lot of savings to draw on for several years. Countries - major oil exporters - have all been hurt, and the ones that were in precarious political and financial situations before - notably Venezuela or Nigeria - those countries have been hurt particularly hard. And the risk of, you know, real political instability or crises emerging there economically are - is very real.
SIEGEL: Professor Bordoff, thanks for talking with us today.
BORDOFF: Thank you for having me.
SIEGEL: Jason Bordoff, director of the Center on Global Energy Policy at Columbia University.
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