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E Work & MoneyHome / Print / Sunday / E Work & Money  

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Published: Aug 29, 2004
Modified: Aug 29, 2004 7:05 AM
Oil prices expected to drop more
Foreign output likely to increase

Crude oil prices, which have dropped sharply over the past two weeks, should decline further in the weeks ahead as Middle East and Russian oil exports pick up and demand slows in the United States, experts said.

That could lead to better deals at the gas pump in the short term, and improve bottom lines for businesses in the months ahead. Some economists had worried that if oil passed $50 a barrel, higher energy prices would start to have a broader effect on the nation's economic health by crimping consumer spending and corporate profits.

"I might not bet the farm, but I certainly think things will improve over the next few weeks," said Jim Smith, an economist at UNC-Chapel Hill.

After peaking at a record $49.40 a barrel on Aug. 20, crude oil prices have dropped 11 percent. On Friday, light crude for October delivery rose 8 cents to $43.18 on the New York Mercantile Exchange.

But last week's 7.6 percent drop was the biggest weekly decline in a year, and came on reduced concern that supplies from Iraq will be disrupted because of unrest.

Smith said falling crude prices are likely to increase stock values over the next several weeks as investors bet lower energy costs will result in higher earnings.

"For President Bush, that's a good thing, because falling oil and gas prices act like a tax cut," he said. Smith said he believes that even a sustained price resurgence above $50 would not crimp U.S. economic growth enough to derail recovery.

He said crude prices are still trading about $15 per barrel higher than what they should be, due mostly to risk premium from threats and rumors of instability in oil-producing nations such as Iraq, Russia and Venezuela.

Mark Vitner, a senior economist at Wachovia in Charlotte, said rising oil production in Iraq, Saudi Arabia and Russia, and the U.S. economy's seasonal drop in demand for fuel this fall should help ease prices through November.

He said the expected cooling of the U.S. economy over the next 12 months will strengthen downward pressure on crude prices.

Many experts now believe the the recent price surge, which unnerved many economists and politicians, reflected speculative trading based on concerns over Iraqi and Russian oil production, more than differences in supply and demand.

"Fifty-dollar-a-barrel oil prices were the equivalent of the Nasdaq at 5,000 during the tech bubble," Vitner said. "There was just an incredible amount of speculation built in."

As tensions ease, so will gasoline prices, which have already fallen over the past eight weeks. The average price of a gallon of regular unleaded was $1.83 in the Triangle on Friday, down from $1.85 a month ago, according to AAA.

Lower gas prices could eventually free up household incomes and boost spending on nonenergy products such as clothing and household items.

Spending on food and gasoline, historically about 40 percent of total consumer spending, averaged 80 percent in the second quarter, due to elevated prices for gas, milk and other commodities, Vitner said.

Campbell Harvey, a professor of finance at Duke University, was less optimistic about the future of oil prices.

He said the possibility of further disruptions in oil-producing nations and continued economic strength in the U.S and major emerging markets such as China and India should continue to buoy prices above $40 a barrel.

"Add it up and the high prices are here to stay," he said.

In addition, any major disruptions in Iraq or other oil-producing nations could lead to oil prices resuming the march toward $50 a barrel.

Nevertheless, a sustained oil price surge is less likely to damage the economy than in years past, Harvey said, because today's economy is less dependent on oil imports.



Staff writer Frank Norton can be reached at 829-8926 or fnorton@newsobserver.com.



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