Oil Price Decline Tied to Economic Travails

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Oil Price Decline Tied to Economic Travails

MINNEAPOLIS, Minn. -- The price of crude oil will bottom out at around $40 per barrel, but long-term predictions about oil prices are more dependent on the state of the economy than on supply and demand factors, according to Brian Milner, refined fuels editor for DTN, a provider of information for a variety of industries including agriculture, refined fuels, commodity trading and other weather-sensitive markets.

In a Webcast yesterday, Milner noted some analysts are predicting the price of oil will average in the area of $40 for all of 2009. “But I am an optimist,” said Milner. “I am going by the economists who say the economy will start to get better by June of ’09. If that happens, I don’t think oil can stay as low as $40 for too long.”

The expert predicted oil prices would climb into the $50-per-barrel area by summer.

“However, longer-term, we have energy policies prompting greater efficiency and mandating the greater use of ethanol, so that will limit the upside of oil prices, even as demand grows in other parts of the world, such as India and the Middle East,” he added.

Oil prices fell more than $2 yesterday to the lowest levels in almost four years due to growing concern about demand in the world's biggest energy consuming nation, the United States. Brent North Sea crude for delivery in January fell below $43 to $42.90 a barrel in late European trading -- the lowest level since February 2005.

Milner said the rapid decline in oil prices from an all time high in July is unprecedented, and “has less to due with oil fundamentals than with the economy.” Milner rattled off several economic factors that have shaken the oil markets: manufacturing activity hit a 26-year low in October, while unemployment is at a 26-year high. The bankruptcies of several freight hauling companies have hurt diesel demand, and consumers’ miles-driven declined in 2008 after flattening the last couple of years.

He did note, though, special events, like terrorism, could cause a spike in the oil markets.