Oil Prices

Report Outline
Economic Fallout
Market Aftershocks
Beyond Economics
Special Focus

Economic Fallout

Winners and Losers Here and Abroad

A tremendous shock wave has once again hit international oil markets. A reverse image of the price increases of the 1970s that brought inflation, recession and trade deficits to oil-importing countries, the latest tremor consists of a collapse of petroleum prices. The value of a barrel of oil has been more than halved since last autumn, falling from just under $30 a barrel to below $11 a barrel by April. Many analysts expect the tumble to continue—barring unexpected agreement among OPEC members on production quotas and a drastic lowering of output, especially by Saudi Arabia. OPEC ministers will meet in Geneva April 15 to try again to reunify the cartel which pushed oil prices to record heights in the early 1980s. In real terms, taking inflation and a weakened dollar into account, oil prices are now the lowest since 1973.

Just as the abrupt price increases of that time transformed much of the world's economy, the present fallout is similarly far-reaching and quixotic, helping one industry or locality and hurting another. Cheaper oil is easing the fear of a renewal of inflation in the industrialized countries, nudging interest rate downward and restoring economic confidence. The prospect of a resumption of economic growth without a significant increase in the cost of living prompted Japan, West Germany and the United States early in March to reduce the discount rates of their central banks by half a percentage point.

American commercial banks quickly followed suit, cutting their prime interest rate on loans to choice commercial customers to 9 percent, down from 9.5 percent, further stimulating an already vigorous stock market. The Consumer Price Index dropped four-tenths of a percent in February, the biggest monthly decline in 32 years, reflecting cheaper oil and food. The average nationwide price of unleaded gasoline at the pump, as reported by Oil & Gas Journal, dropped below $1 a gallon in early March for the first time since 1979. The Commerce Department reported the oil situation was one factor holding the U.S. trade deficit in February 25 percent below the previous month's figure. Better savings could be expected in the months ahead as long-term and thus costly delivery contracts expire.