One On One With Bill O`Grady of AG Edwards
Wednesday, July 12, 2006
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SUSIE GHARIB: Joining us now with more analysis of those oil numbers, Bill O`Grady, assistant director of market analysis at AG Edwards. Hi, Bill.
BILL O`GRADY, ASSISTANT DIRECTOR OF MARKET ANALYSIS, A. G. EDWARDS: Hi, Susie.
GHARIB: Let`s start a little bit about today`s inventories report, the drop in oil supplies and also gasoline supplies. Is this a problem?
O`GRADY: The drop in crude was a bit of a shocker, but it`s probably in part due to some canal issue. We had an oil spill in the Houston area that probably kept some oil supplies out. If I`m right on this, we should see an increase in oil supplies next week. The drop in gasoline was just about as we had expected.
GHARIB: What about consumption? Do you see that consumption of gasoline staying strong, even though we`re seeing prices across the country getting close to the $4 level?
O`GRADY: I expect them actually to come off a bit. Looking at the past four weeks, we`re up about 1.7 percent over the previous period, same period a year ago and that`s actually about normal. Gasoline consumption usually rises about 1.5 to 2 percent over a year`s time. But what we have found is when prices on a national average get to that about $3 level, we start to see that demand growth come off. It`s very unusual to see actually negative demand growth. You almost have to be in a recession to see that, but we would expect that demand growth to start backing down into the half to 1 percent area and that should offer consumers some relief. GHARIB: Not long ago, one of the Wall Street brokerage firms was estimating that oil prices will get to the $100 a barrel level. That seemed like a very unrealistic goal. But now with oil prices at $75, how realistic is to get to that higher level?
O`GRADY: Well at this point, we still think that $100 is probably going to take some sort of event, some sort of geopolitical event or another round of hurricane disruptions. It`s certainly possible we could grind that higher but we probably won`t. There is some nexus of interest rates and oil prices that will eventually cause the economy to run into trouble and that we think will be a natural governor on oil prices and bring them down. We haven`t reached that level yet, but a lot of the work I do suggest we`re probably getting pretty close. And keep in mind, it`s not just the Federal Reserve that`s raising rates. We`re seeing tightening monitoring policy really across the entire G-7 and as that occurs, it begins to slow down world economic growth and then begins to affect world consumption.
GHARIB: So what is that level of oil prices that you`re seeing in your research?
O`GRADY: Well, you know, frankly there is no magic level because you`re dealing with something of a moving target. Economies are always becoming more efficient in dealing with high oil prices and in dealing with interest rates. But we are starting to see some strains develop and my suspicion is, either higher interest rates, much higher interest rates from here or much higher oil prices from here probably starts to affect economic growth. So we are kind of reaching, I think, very close to that magic level. Unfortunately, I`m not good enough to know exactly where that level is.
GHARIB: With all of the tensions going on, escalating tensions with the Iran conflict, in the event that there are any supply disruptions, how much excess capacity does the U.S. have?
O`GRADY: Well, the United States has no excess capacity. The excess capacity in the world exists primarily within the OPEC countries and even there, it may be only a million to a million and a half barrels a day. If we would have a total outage from Iran, there is enough ability to draw down these strategic petroleum reserves to offset that for about 90 days. The problem is that if the situation with Iran escalates and they begin to disrupt shipping in the Persian Gulf, then you`re talking somewhere between15 to 17 million barrels a day and that would have a catastrophic effect on prices. We would see that triple digits that you were referring to earlier probably happen very quickly.
GHARIB: How about the other ways? What will it take to great the price of oil and the price of gasoline to come down? Do you have a quick answer to that?
O`GRADY: My wife would say there`s no quick answers. Ideally it comes down to this. The trade-off we`re face is that if you want oil prices to go down a lot, you got to be willing to accept much slower economic growth and perhaps a recession. In the short run, that`s the fastest way to get oil prices down. In the long run, it`s going to be consumers changing their behavior and buying more fuel efficient cars, that sort of thing.
GHARIB: All right. We`ll have to leave it there. Bill, thanks so much for coming on the program.
O`GRADY: Thank you.
GHARIB: We`ve been speaking with Bill O`Grady at AG Edwards.
