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How will plunging oil prices affect the economy?

The price of oil dropped to a four-year low after the OPEC cartel decided not to cut production levels. Judy Woodruff speaks with Kevin Book of ClearView Energy Partners about the national and global consequences of cheap gas and for how long prices will stay low.

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  • JUDY WOODRUFF:

    Oil prices dropped again yesterday, this time approaching $70 a barrel after the OPEC cartel decided not to cut production levels.

    The decision comes after pressure had built among some OPEC members for a cut. Output keeps growing in the U.S. and elsewhere. New shale production here has added one million barrels of oil a day to the market this year. The average price at the pump is now $2.80 a gallon, and below that in some areas. That's nearly 50 cents a gallon less than it was a year ago.

    Prices for crude have dropped by more than 30 percent since the summer. There are a wide variety of consequences to this big drop here and abroad.

    We explore all of this with Kevin Book with ClearView Energy Partners. It's an independent firm that looks at energy research and investment.

    And we welcome you to the program.

  • KEVIN BOOK, ClearView Energy Partners:

    Thanks for having me, Judy.

  • JUDY WOODRUFF:

    So, why did OPEC members decide they didn't want to cut production levels now?

  • KEVIN BOOK:

    Well, there are two different parts to the OPEC membership right now.

    There are the Gulf producer states, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates, and then there are some of the other high-cost producers. It was the Gulf producers who really didn't want the cut. They wanted to do two things, one, test to see if North America will stop producing and balance the world's supply and, two, maybe discipline those other members, the ones who have been pushing for a cut, so that they bear some share of the burden for it when it happens.

  • JUDY WOODRUFF:

    Now, let's talk about the first part. What is it that they're looking for in the U.S. and the West, the Western oil producers?

  • KEVIN BOOK:

    Well, the U.S. producer is a high-cost producer for the most part.

    A lot of our new oil, the shale oil and the oil from other type of formations that you hear so much about, actually is a little bit expensive relative to the world market. So if you look at where prices have gone, at least some of it is likely to stop. You don't shut in wells here in the United States. What do you is, you don't drill the next one.

    And because these wells decline so fast, it means that there is some possibility you will start to see a response, much like the response the Saudis used to do on their own, where supply will just start to taper off.

  • JUDY WOODRUFF:

    But we haven't seen that yet.

  • KEVIN BOOK:

    It hasn't happened yet.

  • JUDY WOODRUFF:

    The other part of it you mentioned was a difference of view among OPEC members themselves.

  • KEVIN BOOK:

    The high-cost producers like Iran and Venezuela very much wanted to see a cut, but they didn't want it to be their oil. That's a problem that Saudi Arabia hopes to remedy by maybe giving them a little bit of a breeze in their face for the next several months.

  • JUDY WOODRUFF:

    So they keep production at a level about where it is right now. Oil prices are dropping. How long will they stay that way?

  • KEVIN BOOK:

    Well, there's other things that matter too. One is demand.

    Demand has been moribund globally. You would expect to see ordinarily, with prices falling this much, a rebound, uptick in transportation event, more people driving, more people flying. But the truth is we have gotten a lot more efficient, Judy, so you don't feel it as much.

    And GDP drives most of the incremental demand in the developing world, and their GDP isn't growing as fast. So what you're getting is a relatively slow time on the demand side. That could pick up and curtail some of the glut right now. But I would expect to see it go for another three to six months.

  • JUDY WOODRUFF:

    So, in the meantime, who is hurt by the most by this? We know a number of countries are going to feel — are already feeling it now.

  • KEVIN BOOK:

    Well, the biggest pain is probably being felt by Venezuela.

    They have a very high cost for breaking even for their economy. And a lot of their oil is already spoken for. It goes in kind to China. Even if the price were higher, they couldn't take a market price for it. Then there's Iran. And Iran is in an interesting situation. They might have another million barrels per day if there's an Iran deal on nuclear sanctions with the P5-plus-one, and so they very much don't want to rock the boat right now because they need to ask for something later.

  • JUDY WOODRUFF:

    And Russia.

  • KEVIN BOOK:

    Well, Russia — Russia's in a situation where not only are they facing a low price, but they can't have investment coming from the West in some of the fields they want to develop.

    For Russia, the problem is really three to five years out, because what they will be facing is a situation where there's stark declines in their conventional fields.

  • JUDY WOODRUFF:

    Benefiting from this, though, consumers in the U.S. and elsewhere, who use a lot of gasoline and are happy to see prices go down.

  • KEVIN BOOK:

    This is a shot of stimulus for the U.S. economy, $65 billion a year, based on a 50-cent-per-gallon decrease. That's a lot.

    But it doesn't go everywhere all at once. And some consumers might not necessarily spend right away. It's — ironically, the longest-distance drivers, who are the most affected, are the ones in the lowest-income households, and they may not be rushing to the store for reasons that have nothing to do with the gasoline price.

  • JUDY WOODRUFF:

    Can you say what the near-term effect or near- and medium-term effect is going to be on the U.S. economy?

  • KEVIN BOOK:

    Well, it's likely to be stimulative and it's likely to take a little time to stimulate.

    Right now, year to date, the price drop hasn't been here that long, so on an average household basis, we estimate about $80 per household, individual that actually has been received by lower prices to date. That's not a whole lot of stimulus just yet.

    Go a full year at $75 a barrel, and you're talking about $330, $340. That starts to show up.

  • JUDY WOODRUFF:

    Not an incentive right now to drive less anyway.

  • KEVIN BOOK:

    Well, no. No one is driving less. And they might start driving more.

  • JUDY WOODRUFF:

    All right, Kevin Book with Clearview Energy Partners, we thank you.

  • KEVIN BOOK:

    Thanks so much for having me.

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