Con­sumers should feel muted im­pact from ris­ing oil prices

Daily Local News (West Chester, PA) - - MARKETPLACE - By David Koenig AP Busi­ness Writer

OPEC’s de­ci­sion to cut pro­duc­tion gave an im­me­di­ate boost to oil prices, but the im­pact on con­sumers and the U.S. econ­omy is likely to be more mod­est and grad­ual.

The car­tel agreed Wed­nes­day to cut out­put by 1.2 mil­lion bar­rels a day, re­vers­ing a strat­egy that pro­duced lower oil prices and pain for U.S. drillers but saved money for con­sumers.

Even if OPEC mem­bers carry through on their prom­ises, global oil pro­duc­tion would only fall by about 1 per­cent. There is still more sup­ply than de­mand — the rea­son oil prices col­lapsed be­gin­ning in mid-2014.

The agree­ment has sparked a two-day rally in oil of about 12 per­cent to above $50. If the price keeps ris­ing, some of the slack from OPEC cuts will be picked up by pro­duc­ers in the United States — good news for drillers and oil­field work­ers in Texas and North Dakota. Pres­i­dent-elect Don­ald Trump has vowed to in­crease drilling in the U.S., the world’s third-largest pro­ducer af­ter Saudi Ara­bia and Rus­sia, which would help en­sure there is plenty of oil.

In short, an­a­lysts say, con­sumers and busi­nesses are not likely to see the re­turn of $100-a-bar­rel oil — and the high en­ergy costs that came with it — any­time soon.

Still, there could be some short-term shocks even be­fore OPEC’s cuts take ef­fect in Jan­uary.

“The av­er­age Joe fill­ing up his tank may no­tice in the next week or two that gas prices move higher by 5 to 15 cents a gal­lon just on the psy­che of the deal,” said Pa­trick DeHaan, an an­a­lyst for GasBuddy, a site used to com­par­i­son-shop for gaso­line.

The U.S. En­ergy Depart­ment pre­dicts that heating oil costs will rise about one-third this win­ter, but that pre­dic­tion was is­sued more than a month ago and was based heav­ily on fore­casts of much colder tem­per­a­tures in the North­east. If the weather fore­cast proves wrong, prices could sink be­cause heatin­goil in­ven­to­ries are run­ning above their 5-year av­er­age and grew again last week.

A small in­crease in gaso­line or even a big­ger jump in heating oil, which is used in only 5 per­cent of Amer­i­can homes, won’t af­fect shop­pers if the econ­omy does well, in the view of Michael Niemira, chief econ­o­mist at The Re­tail Econ­o­mist LLC, which does a weekly re­tail-sales re­port with Gold­man Sachs.

“The con­sumer isn’t re­ally fo­cused on gaso­line since prices re­main low. A bet­ter econ­omy, a bet­ter la­bor mar­ket — those mat­ter much more,” Niemira said. But if gaso­line spikes to $4, “that could be bad. “

Crude has traded be­tween $40 and $50 a bar­rel the last sev­eral months. The na­tional av­er­age for gaso­line on Thurs­day stood at $2.16 a gal­lon, ac­cord­ing to the AAA auto club.

Be­fore the OPEC meet­ing, the U.S. En­ergy Depart­ment pre­dicted that crude would rise to $50 or $51 a bar­rel next year.

Sal Gu­atieri, se­nior econ­o­mist at BMO Cap­i­tal Mar­kets, said mod­estly higher oil prices will ac­tu­ally help the U.S. econ­omy by spurring in­vest­ment in the en­ergy in­dus­try with­out drain­ing con­sumers’ pur­chas­ing power. He ex­pects an av­er­age price of about $53 a bar­rel next year as a re­sult of the OPEC pro­duc­tion cuts.

“The losers are Europe and Ja­pan — oil-im­port­ing re­gions of the world,” Gu­atieri said.

U.S. pro­duc­ers are likely to be win­ners. Drilling fell off af­ter oil prices started to slide in mid-2014. The num­ber of ac­tive U.S. drilling rigs bot­tomed out at 404 in May and has been ris­ing since, to just be­low 600 last week. That’s still down 20 per­cent from a year ago, how­ever.

The Fed­eral Re­serve Bank of Dal­las re­cently sur­veyed pro­duc­ers and found that most be­lieve crude must be $55 or higher be­fore drilling picks up sig­nif­i­cantly, said Michael Plante, an econ­o­mist for the bank.

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