FILL IT UP

December 28, 1998

Elizabeth Brackett of WTTW-Chicago reports on cheap oil for the holiday season.

ELIZABETH BRACKETT: There are lots of smiles at the gas pump these days. MAN: I think they're great - 87 cents a gallon - 97 cents - can't beat it. ELIZABETH BRACKETT: When a cup of coffee costs more than a gallon of gas, as it does at this Northwestern Indiana gas station, spending habits change. MAN: I love it. They're - I put premium - normally I use special - but with these prices I go for the gusto. ELIZABETH BRACKETT: How much money do you think you've saved over the - MAN: Every time I come I put 20 to 25 dollars' worth. I used to have to put 40 dollars' worth of gas. ELIZABETH BRACKETT: It's a far cry from 25 years ago when gas shortages sent prices soaring and brought long lines to the pump. Today it's cheap gas that is stacking up customers and concerns about fuel efficiency are in the past. ELIZABETH BRACKETT: Now when you bought this Thunderbird, did you think about the low gas prices? CONSUMER: Yes. I did, because I do have a V8, but I'm in the car a lot of miles. ELIZABETH BRACKETT: So, would you have bought a car like this if it had not been for the low gas prices? CONSUMER: No. I would have gotten a car with a smaller engine. ELIZABETH BRACKETT: An analysis by the American Automobile Association in Chicago shows that in the Midwest, as in the rest of the country, gas prices have dropped dramatically. In January of 1997, the average gas price in the Chicago area was $1.45 a gallon. By February of 1998, the price had dropped to $1.14 a gallon, and in December of 1998, the average price fell to $1.10 a gallon. But low prices have meant big savings for the airline. United says its fuel costs were down 13.7 percent in 1998. It costs less to run city buses too. The Chicago Transportation Authority reports a $4 million drop in diesel fuel costs in 1998. Diane Swonk, deputy chief analyst at BankOne Corporation in Chicago, says not only is this good news for the consumer, it's good news for the economy as a whole. DIANE SWONK: When oil prices are falling it shows up in everything from low mortgage rates - because those are based in part on inflation and inflation is low - of course, it's helped to low costs of heating bills to low costs of fueling up your car at the gas station pump. And these are all major portions of a consumer budget. When they don't have to spend as much there, of course, they have more money to spend on everything else in the U.S. economy. ELIZABETH BRACKETT: University of Chicago economist Robert Aliber says there are two reasons behind the current glut of oil on the market. ROBERT ALIBER: We've had two sorts of shocks; the first shock was the Asian shock, that reduced demand; and the second shock is the cartel has sort of come apart. And that means that some cartel members, some members of OPEC, are producing more than they had agreed to produce, and they are doing that because the decline in the oil price due to the demand shock made them less well off, and they needed to recoup the money. ELIZABETH BRACKETT: Not everyone's a winner with low fuel costs. For oil producers, like AMOCO, rock bottom prices for crude oil have meant mergers and potential layoffs. The $63 billion merger between AMOCO and the British Petroleum Corporation is expected to mean the layoff of at least 6,000 employees. Swonk says it's easy to see the bind oil producers are in. DIANE SWONK: Producers are in a very tough position when oil prices go down; they're really subject to whims of the market when you're dealing with something like a commodity like oil. They can't change their cost of production as rapidly as the cost of oil changes, and as a result, they get squeezed dramatically when prices fall. They still have to pay their workers the same amount of money, yet the cost of the -the price of the good that they're selling is going down dramatically. That's just one of the toughest environments to try to compete in. ELIZABETH BRACKETT: Oil distributors are hurting too. John Sweeney is the third generation of Sweeney's to serve the Chicago area market. He says business is down by half. JOHN SWEENEY: We've had a double whammy, which would be the last year being one of the warmest winters in a hundred years here in the Midwest, and also this year starting out the same way, right through December, where, I mean, we're 22 percent warmer than we were last year, which was 33 percent warmer than the 30-year norm. We've taken a tremendous hit, just in deliveries alone. ELIZABETH BRACKETT: Sweeney stays in business by hedging his oil contracts by locking in prices on the Chicago Futures Exchange. Like everyone else, he wonders how long the low oil prices will last? JOHN SWEENEY: Could last three weeks, could last three months, but at some stage the cartel is going to reorganize; output will be curtailed; exports will be curtailed; and the price will go back to 14 to 16 dollars, and perhaps 18 dollars. ELIZABETH BRACKETT: And the impact on the U.S. economy will be - JOHN SWEENEY: Will be that we'll have less money to spend on other things because we'll be spending more on energy, and that the inflation rate could be somewhat higher as a result of the increase of oil prices. ELIZABETH BRACKETT: But until that happens filling up the tank will continue to be a pleasure. PHIL PONCE: Phil Ponce takes it from there. PHIL PONCE: Joining me now are Larry Goldstein, president of the Petroleum Industry Research Foundation, and Csaba Csere, editor-in-chief of Car and Driver Magazine. Gentlemen, welcome. PHIL PONCE: Mr. Goldstein, first of all, a quick point of information. Looking at it in the big historical picture, is - where is the price of gasoline right now? How would you describe it? LARRY GOLDSTEIN, Petroleum Research Foundation: Gasoline in real terms are at historical lows. We've never seen prices at this level, and that includes federal and state taxes, which are rising steadily over the forecast period, and throughout history. Federal taxes on gasoline used to be 4 cents a gallon and state taxes were 9 cents a gallon. Today, the comparable numbers are 18 cents and 20 cents, and despite the inclusion of these higher taxes, gasoline prices are the best buy they've ever been. PHIL PONCE: So, Mr. Goldstein, this is as cheap as it's ever been. LARRY GOLDSTEIN: Yes, it is. PHIL PONCE: And how about the - how about the price of oil, itself, crude oil per barrel? LARRY GOLDSTEIN: Adjusted again for real terms it's probably at a 35-year low. While we have seen lower prices in the 1950s, crude oil was selling around $2 a barrel, but from the 70s on we haven't experienced this price in that 35 year period. PHIL PONCE: Mr. Goldstein, we heard one explanation in Elizabeth Brackett's taped piece as to why the price of oil was so low. How do you explain it? Walk us through it. LARRY GOLDSTEIN: It's relatively simple. The Asian economies have been responsible for about ¾ of the growth of petroleum demand historically, and this year the Asian economy's declined. Demand suddenly collapsed. Supply doesn't respond as quickly as the change in demand, so what we've seen is an accumulation of inventories in 1998 to the tune of about a million barrels a day, and the reason that prices are as low as they are is that million a barrel a day inventory build was on top of a million barrel a day accumulation in 1997. So we have an excessive situation with inventories, and it's this very high burden of inventories that are pressing down on price. And we're not likely to see a substantial change in oil prices until the Asian economies either improve, which is not likely to be seen in 1999, or the OPEC producers realize that the only way prices can change is if they can take control of supply and cut production. PHIL PONCE: Mr. Csere, what has been the impact on consumers? Are people driving more? Are they buying more gasoline? CSABA CSERE, Car and Driver Magazine: I don't think they're necessarily driving any more now than they would have been otherwise but American consumers have been steadily driving more for the past several years. Back in 1990, the average motor vehicle covered about 10,600 miles per year. Today it's more like 11,600 miles per year, and if we go out to 2010, it's going to be more like 14,000 miles per year. This isn't really being directly affected by this low oil price, but if we didn't have this low oil price, then I think we'd see a few changes in that trend. PHIL PONCE: By the way, Mr. Csere, do you buy what seems to be conventional wisdom as to what is causing these low oil prices, the fact that demand dropped in Asia, that prices dropped, and some of the oil producing companies kept producing oil, adding to the inventory, and on top of that a warm winter, does that sound right to you? CSABA CSERE: Well, it makes perfect sense because it certainly hasn't been any reduction in demand on the part of the American motorists. Not only are they driving more per car per year, but there is more of us. The U.S. population was about 250 million in 1990. It's going to be 300 million in 2010. The percentage of those people who actually have driver's licenses and drive is steadily increasing because we have an elderly population. The elderly are going to be healthier and more affluent than they have been in the past, and we also have urban sprawl in the United States and people simply have to drive further to get where they're going, so it is - the explanation for this reduction in demand isn't from American motorists, it has to be from some other sources. PHIL PONCE: Mr. Csere, how about - what it is Americans are driving - is this cheap and plentiful gas causing people to buy some of these sport utility vehicles and other so-called gas guzzlers? CSABA CSERE: In part, it's helping that trend, but that trend has been going on for a long time. The American preference for trucks began in about 1955, and it's been following a steady upward curve since that. The only thing that really broke that trend was from about '75 to '80, which was during the time of the first fuel crisis with an enormous jump in price. After 1980 again people went back to trucks and certainly the low oil price is helping to fuel that, but this is an underlying trend that's going to be continuing virtually under any circumstances. PHIL PONCE: Mr. Goldstein, how about the impact on oil companies? Explain the connection between these lower gas prices and the mergers that we're seeing, the proposed mergers, like the one between Exxon and Mobil. LARRY GOLDSTEIN: This trend for mergers is a trend that developed in the early 1990's, so it's not the result directly of lower oil prices, but the industry has to compete in a global competitive environment and the exploration for cost savings are dominating the move for mergers. What oil prices have done, however, is create a political environment that's conducive to allow these mergers to occur. The public is not upset about the mergers; they're very happy with the prices at the pump; and if the public is not unhappy, then the political system is - sits back and is more relaxed about the process. So the regulators are allowing this natural development to continue to occur. PHIL PONCE: But the stated reason for the mergers is what, since profits are lower, companies have to combine to what, gain greater efficiencies to continue to operate profitably, is that the rationale?   LARRY GOLDSTEIN: That's completely the rationale. If you can't control your price, then you have to look at what you can control and what you can control in this environment is cost. PHIL PONCE: Mr. Goldstein, earlier you talked about how long these low prices might continue. Any impact on what's happening in Iraq, for example, on oil prices in the near future? LARRY GOLDSTEIN: No. Remember, the humanitarian oil sales; the UN allows Iraq to sell a dollar amount of oil so that Iraq can sell up to $5 billion every six months, but Iraq is capacity-constrained for the moment, and, therefore, we know how much oil we're going to see from Iraq, and Iraq's production is about 2.3/2.4 million barrels a day. That's not likely to change on the upside anytime over the next six months. PHIL PONCE: And Mr. Csere, what is your guess as to how long these low prices might be around? CSABA CSERE: Well, I'm not the oil expert, but I think everyone in Detroit here hopes it lasts for a while because it's been great for the car business. This year, we're going to see roughly 15.7/15.8 million sales of motor vehicles. This will be an unprecedented fifth consecutive year with about 15 million sales, so it's been great for the automotive business. PHIL PONCE: Mr. Goldstein, do you ever foresee events like those that happened in 1973 with the lines at the gas pump and that sort of thing, is that - could that happen again? LARRY GOLDSTEIN: It could happen again, but we don't anticipate it. What the public has learned, that prices can not only go up but they also can go down, and when crude oil prices change, they get reflected very quickly at the pump in both directions. PHIL PONCE: And is there any sign that we should look for that would tip us off that gas prices are going to start inching their way back up, Mr. Goldstein? LARRY GOLDSTEIN: The futures markets are a good leading indicator of the direction of prices, if not the levels, and there's a big meeting coming up on March 23rd by the producers, if, in fact, they agree to cut production, we could see 3 to 5 dollar higher crude oil prices towards the second half of 1999; if they don't, prices are going to sit in the 12 to 14 dollar range indefinitely. PHIL PONCE: Well, gentlemen, thank you both very much.