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Oil Falls Below $70 a Barrel
Slide Forecasts Recession, Analysts Say

By Kendra Marr
Washington Post Staff Writer
Friday, October 17, 2008

Oil prices are falling, but the industries that might benefit the most from cheaper fuel aren't celebrating. In fact, any hope that discounted crude oil might lift prospects has been swiftly crushed by the weight of the economic downturn.

In normal times, news that the price of crude oil had dropped below $70 a barrel would have boosted the engines of American industry, especially following the summer peak of $147.27 a barrel.

For airlines, lower fuel prices translate into cheaper flights that lure more passengers. Even the pizza-delivery man won't find gas prices eating as deeply into his profits.

But the fact that sweet, light crude for November delivery fell to $69.85 a barrel yesterday, beating Tuesday's short-lived low of $74.54, is not the sign of good times; it's forecasting a recession. The price is falling because investors assume the world will need less energy, analysts said.

Falling fuel prices even contributed to Southwest Airlines yesterday reporting its first quarterly loss in 17 years. The airline had assumed the price would be much higher, and had to write down the value of its price-hedging contracts.

"Until a couple months ago, crude oil was a leading asset," a signal that world economies were growing, said Christopher Edmonds, the managing principal of FIG Partners Energy Research & Capital Group. Investors could use the price of oil as a gauge to assess the prospects for other industries.

"That has gone away," Edmonds said. "Now crude is in a following asset class. People are looking to the equity and credit markets for a clue to the overall economy, then they react and trade crude oil."

For Tom Sutton, owner of Foxglove Flowers in Alexandria, falling oil prices bring only a little relief. More pressing: Foxglove's orders are down 75 percent.

"We're usually quite busy this time of year, and it's been a little painful," said Sutton, who has been in business 28 years.

At the pump, a gallon of regular gasoline dropped another 4 cents to a national average of $3.084, according to auto club AAA. A gallon of diesel shed 3 cents this week to $3.764 a gallon.

For most of the year, independent trucker Lee Klass, who was driving through Maryland yesterday, said he has been lamenting the high cost of fuel. Yet, now, it's becoming increasingly difficult for him to find loads to carry, as businesses stock fewer products because of declining consumer demand.

"If they're not buying stuff, I'm not trucking stuff," he said.

Jet fuel is $96.80 a barrel, about 16 percent less than a week ago, according to Platts, a division of McGraw-Hill that supplies information to the energy industry.

Fuel prices contributed to the third-quarter losses reported by two airlines yesterday -- but for different reasons.

Southwest Airlines said it lost $120 million after it took $247 million in charges, attributed mostly to writing down the value of fuel price-hedging contracts. Previously, such contracts had helped the airline avoid the spikes in costs that bedeviled other carriers.

Continental Airlines, meanwhile, posted a $236 million third-quarter loss because of high summer fuel expenses.

On separate conference calls with investors yesterday, executives at both airlines expressed optimism that fuel prices would not gallop upward soon, though they said they remained very concerned about the health of the economy.

"Demand for air travel will be adversely affected by a recession, and it remains to be seen how deep, long and wide that recession may be," Lawrence Kellner, Continental's chairman and chief executive, said during a conference call with investors.

Phil Flynn, a senior trader at Alaron Trading, tried to make the best of the gloomy outlook. "The hope is that oil prices continue to fall and at some point the economic stimulus the government has pumped into the system will take hold," he said.

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