The recent sharp drop in the price of crude oil is handing energy-consuming corporations, especially airline, petrochemical and shipping firms, a huge financial boost, and economists said yesterday that oil prices could fall further.
The price of oil on the New York Mercantile Exchange yesterday dropped $1.39, or 4.8 percent, to $27.46 a barrel, its sharpest one-day decline since the war in Iraq started and well below the $37.82 closing price March 12, a week before the war began.
The cost of oil has plunged as traders realized that the vast Iraqi oil fields have emerged largely unscathed at a time other oil-producing nations have increased production to record levels.
The Paris-based International Energy Agency reported yesterday that global oil production rose to an all-time high of 80.3 million barrels a day in March, spurring concern that a glut is developing, even with the loss of Iraq's production of 2.5 million barrels a day during the war.
"For energy consumers, this is very attractive news," said Joseph Stanislaw, president and chief executive of Cambridge Energy Research Associates Inc. in Cambridge, Mass. A $10-a-barrel cut in oil prices "is a lot," he said. "It's a shot in the arm for the world economy when it needs it."
Stanislaw said the price drop "doesn't get us out of the woods" in reinvigorating national economies or corporate profits. But it "removes one very significant pressure and puts money in the hands of consumers."
The price drop is also fattening corporate coffers at a time when many of them are depleted.
With the decline in crude prices, the cost of jet fuel has dropped to 76 cents this week from $1.28 a gallon five weeks ago. American Airlines, the biggest carrier, said every penny-a-gallon drop in the cost of fuel saves it $30 million a year.
"Fuel is the second-highest expense, after wages," American spokesman John Hotard said. "It's an expense you truly cannot control."
Still, he described the price of oil as recently going "from extremely high to very high." He noted that American has locked in 32 percent of its crude oil purchases for this year at $23 a barrel, although it has had to buy other crude at higher prices, which it then has refined into jet fuel. The current price is "surely better than the alternative, but it's still high."
Continental Airlines said it saves $1.25 million a month for every penny-a-gallon drop in the price of fuel.
Petrochemical giant DuPont Co. warned its investors in January that a 10 percent increase in crude oil prices above a presumed long-term average of $24 a barrel would raise the company's raw-material costs by $100 million over the course of the year.
Even with the oil price decline in the past three weeks, Ann Gualtieri, DuPont's vice president of investor relations, said the company will continue to feel the economic effect of the high energy prices.
"We are pleased to see the recent drop in oil and natural gas prices," she said, "although prices are still greater than historical averages. There is a lag effect of raw materials moving through the supply chain. As a result, for the next one or two quarters, our businesses will continue to feel the impact of this winter's extremely high market prices."
John C. Felmy, chief economist at the American Petroleum Institute in Washington, said transportation, road-building, petrochemical, trucking and plastic companies stand to gain the most from the drop in crude prices.
He said that "for every $5-a-barrel drop in the price of crude it means an increase of 0.2 to 0.3 percent" in the national gross domestic product. Because the price of oil has dropped about $10 a barrel, he said it could boost the GDP from the 1.4 percent annual growth rate in the fourth quarter of last year by 0.4 to 0.6 percent.
"The price of oil wants to go down," Stanislaw said. "There are very high levels of production right now." Venezuelan production is "back very strong" after a strike by oil workers, the war in Iraq "is winding down," and Nigeria "is settling down" after tribal warfare caused oil producers to curtail production for safety reasons, he said.
"All the fundamentals are in place" for a further drop in oil prices, he said. Nonetheless, he said that further price drops could be limited if the Organization of Petroleum Exporting Countries agrees at its planned April 24 meeting to cut production from its March rate of 26.3 million barrels a day.