(http://www.star-telegram.com/business/story/820062.html)

Aug. 09, 2008

WASHINGTON — Oil prices fell Friday by almost $5 a barrel to $115.20 and are down more than 20 percent from their early July record high of more than $147, a trend that’s triggering a sudden boom in stock prices and giving the U.S. economy its best news in months.

Energy analysts cautiously believe that oil’s recent price surge finally may be reversing for good, as a weakening global economy and a strengthening dollar take the shine off oil as an investment.

The falling oil prices — and gasoline prices, too — should lower inflation and lending rates, boost consumer confidence and could even influence whom voters pick in November’s presidential election.

For motorists, it could mean oil prices under $100 a barrel this year and deeper price declines at the gas pump. Already, the national average for a gallon of gasoline, which stood at $4.10 a month ago, was down to $3.84 Friday, according to the AAA automobile club.

In the week of March 14-20, when oil traded just above $99 a barrel, the national average price of gasoline was $3.27. Analysts think that gasoline prices could go under $3.50 a gallon by Labor Day and fall to March prices by late this year.

“It’s tough to call one week a trend . . . but we feel a little more comfortable in saying there is a developing trend coming. We believe that we’ve seen the top of oil prices,” said James Crandell, an energy analyst with the Wall Street investment bank Lehman Bros.

The Dow Jones industrials closed up 302.89 points at 11,734.32 Friday, and rose 408 points, or 3.6 percent, for the week — their best week since mid-April.

What it means

If oil and gasoline continue to retreat, that’s likely to boost personal consumption, which rose a tepid 0.6 percent in June and didn’t keep pace with rising prices.

Wall Street seems to think that falling oil and the gaining dollar favor consumption. During a huge rally Friday on Wall Street, retailers such as McDonald’s (ticker: MCD) and Home Depot (HD) saw their share prices gain 6.2 percent and 7.7 percent, respectively.

“What this really means is it has a big impact on people’s sentiment, on how it’s going to affect the consumer,” said James Paulsen, chief investment strategist for Wells Capital Management, a subsidiary of California-based Wells Fargo Bank.

Pointing to rising share prices for retail stocks, Paulsen said it reflects “that sentiment that if gas prices come down, maybe the consumer won’t die as we thought.”

The big picture

Oil’s fall is all the more stunning given current affairs. Russia, the world’s second-biggest oil producer, invaded its neighbor Georgia on Friday. The United States and Europe are poised to impose more economic sanctions on oil-rich Iran. And a pipeline in volatile Central Asia that carries vital global oil supplies exploded this week.

A few months ago, any of these scenarios could have sent oil beyond $150 a barrel. Instead, traders shrugged off geopolitical developments as oil prices retreated $4.82 per barrel on the New York Mercantile Exchange.

What gives? Weren’t geopolitical risks the alleged reason why oil traders were demanding a so-called fear premium, a price cushion above what normally would be determined by supply and demand?

“The fundamentals are coming into play for oil, and they are terrible,” said Phil Flynn, a commodities expert at Chicago’s Alaron Trading.

The rest of the world was wrongly thought to be immune to the U.S. financial crisis, he said, and now evidence of economic slowdown in Asia and Europe has reduced projected demand for oil.

Other concerns

Another important factor in oil’s fall has been a rally by the U.S. dollar.

It closed the week up 3.6 percent against the euro, the currency of the European Union. The dollar has gained about 7 percent since its record low last month against the euro of $1.6040. Oil is priced globally in dollars, so a stronger dollar drives down oil prices.

Falling oil prices give the Fed some breathing room. Its mission is to promote full U.S. employment while keeping inflation at bay, often contradictory tasks. When oil was above $140 in July, many economists feared that the Fed would be forced to raise rates to combat oil-driven inflation at a time when the U.S. economy is so weak that a rate increase could tip the nation into recession.

Those concerns are ebbing with the price of oil.

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