A drop in interest rates is supposed to cause an economic jump-start that stimulates demand. Tomorrow the Fed is almost certain to lower rates, so that should explain why the price of crude oil keeps going up. The greater the demand, the higher the price. Today's close was a record $80.70, the fourth day oil prices have hit records. Not that there's always a connection, but gasoline prices are shooting up, too, according to the new government survey released this afternoon. In L.A., the average price is now $2.895, or 15 cents a gallon higher than just three weeks ago. Of course, just when you think you've got it all figured out, along comes a contrarian like Mike Rothman, head of integrated oil research of the ISI Group, who believes oil is headed down, to $45 a barrel. Huh? Here's some give-and-take from his interview with Barron's.
So how do you explain crude prices rising to new highs after the Saudis announced they would increase production?
It would be an understatement to say I was taken aback by that. In a few days, the market went from expecting no hike in production, to expecting a largely symbolic increase, to getting a final agreement to inject 500,000 barrels a day above existing levels -- which is the equivalent of a 1.4-million-barrel-a-day boost in quotas. The big question at the meeting is, "What is bolstering the price?" I'm not sure, except the market seems to still believe the world is running out of oil.
What about demand in the U.S.?
We have seen a very recent significant slowdown in U.S. oil-demand growth. Also, jet-fuel demand historically has been a leading or coincident indicator for the economy, and jet-fuel demand has turned negative. That is not an economic forecast. But when jet-fuel demand is really soft, you have got to worry about whether something's going on with the economy.
Well, is demand slowing because of high prices or because the economy is slowing?
That is hard to say. Guys like me count barrels. But when you see oil-demand growth slow, you figure there are two things going on: There is substitution and there is conservation. People try to do more with the same number of barrels or they use alternatives. They may use more coal. They may increase their burn of natural gas in place of oil. They drive less. They may car pool. I'm not going to sit here and make up answers that I don't know. I just know that the rate of oil-demand growth has really been much lower than what has been forecast. I know I have had to make very big negative downward revisions in demand over the last three years, and it tells me that higher prices affect consumption. Three of my five kids drive, and last summer two of them stopped driving because I wouldn't buy their gasoline.