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Is there a down side to the recent plunge in oil prices?

Over the last few weeks, the price of oil has dropped dramatically. While this may be good news for consumers, for Wall Street the numbers tell a different story. The Wall Street Journal's Nick Timiraos joins Hari Sreenivasan from Washington, D.C. to help make sense of the downward trend.

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  • HARI SREENIVASAN:

    We've been following the dramatic drop in oil prices over the last few weeks, but those prices are just a snapshot of a much more dramatic downward trend.

    Over the last year, a barrel of oil went from $96.47 to $67.18. That's a 30 percent plunge. Since Monday, the price per barrel of domestic sweet crude dropped from $63.13 to $54.25, a 14 percent slide.

    For consumers, this might seem like welcome news, but, for Wall Street, the numbers tell a different story.

    Here to help us make sense of the downward trend is Nick Timiraos of The Wall Street Journal, who's joining us from Washington, D.C.

    So, this is a good thing for consumers. The price of gas is dropping at the pump. They feel like they have more money in their pockets, right?

  • NICK TIMIRAOS:

    Yes, that's absolutely right. I mean, in June, U.S. consumers were paying on average $3.68 a gallon for gas. Now, we're down below $2.60.

    So, this is a surprise windfall and it really benefits the middle class because the middle class and lower income households spend a higher share of their income and gas accounts for a higher share of their spending than it does for the average.

    So, it really is a middle class tax cut on the order of $125 billion a year if prices are sustained at these levels.

  • HARI SREENIVASAN:

    OK. So, if people have more money in their pockets and they go out and perhaps they do a little bit more holiday shopping or they juice the economy up a little bit more, what's happening to Wall Street?

    Why does Wall Street start to tumble even though people have more money in their pockets?

  • NICK TIMIRAOS:

    Well, because, this has been a big surprise.

    A 45 percent drop in the price of crude oil since June — that's going to create a lot of volatility, and Wall Street doesn't necessarily like that.

    The reason — one of the big reasons oil has fallen is because of a slow-down in demand in Europe, Japan where there are worries about deflation.

    And then, of course, in China, which has been a huge economic growth story for the past 15 years.

    So, these concerns that the rest of the world might be slowing down, that's what's really cause something concern on Wall Street.

    And then you also had some tremendous energy investment in the United States because a lot of the surge in the supply of oil has been brought about from fracking in North Dakota and Texas.

    And so, you've had a lot of small companies raise a lot of debt from the new fracking boom.

    And with oil prices falling, it calls into question the business prospects for some of those companies.

  • HARI SREENIVASAN:

    So, is there kind of a tipping point or a basement that's necessary for the price to be at, for an oil company to say, you know what, it makes sense for to me to dig a hole in the ground and invest $1 million to find another well or to extract oil from another well?

  • NICK TIMIRAOS:

    Yes. No, we are testing those prices right now.

    I mean, a few months ago when oil was at $80, people said, well, maybe $70 would be the break-even, maybe $60 a barrel would be the break-even.

    Now, we're down below $60 a barrel.

    So, we're going to find out over the next few months, already you're seeing drill well counts, the number of drills in the ground in the U.S. going down.

    So, it is going to be a test here to see at what price will investment slow and will production slow for these new frackers along the middle continent of the United States.

  • HARI SREENIVASAN:

    And as a ripple effect, we're also seeing the Russian economy or the Iranians, other oil producers are up in arms about this, right?

  • NICK TIMIRAOS:

    Yes, I mean, this is not good news at all for Venezuela.

    Not good news for Vladimir Putin and Russia. But it's great news for the U.S.

    I mean, even though the U.S. has had an energy boom and so there are more risks now to a drop in oil prices than in the past for the United States, the rewards still outweigh those risks.

    This is still net positive for the United States economy because we still are on net an importer of oil.

    And so, when oil prices go down, that's going to be great for consumers.

    And consumers really — you know, they have been hanging in there during this so-called economic recovery, but they haven't been feeling great.

    And now, we're beginning to see better consumer confidence numbers. Retail sales figures this week reported for the month of November were great.

    And so, there's a lot of optimism now and there are a lot of U.S. benefit — U.S. businesses that benefit, frankly from this — airlines, trucking companies.

    And so, we should begin to see better prospects for U.S. growth here.

  • HARI SREENIVASAN:

    All right. Nick Timiraos of The Wall Street Journal joining us from Washington, D.C., thanks so much.

  • NICK TIMIRAOS:

    Thanks, Hari.

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