BEHIND THE OIL PRICE DROP

As people headed to the polls yesterday, they finally heard some good news about oil prices – they briefly dropped below $50 a barrel for the first time in a month. The result should be lower prices at the gas pump, eventually.

Crude oil futures for December delivery fell $1.63 on Monday, closing at $50.13 a barrel. The price dipped to $49.30 during the day’s trading, the lowest level since Oct. 4.

If the price of crude remains down, gas prices should also fall, especially in areas where there is competition among suppliers. The situation for home heating oil is a bit trickier because the supply is determined by refinery capacity as well as oil costs. The heating oil supply in New England remains tight and a harsh winter could boost demand, keeping prices high.

The crude oil price drop is mainly due to a stable supply. Over the summer, oil prices rose steadily due to fears of disruption of the oil supply. The fears were heightened by continued fighting in Iraq, instability in Nigeria and questions about the future of Russia’s largest oil company. At the same time, demand, especially in Asia, was increasing rapidly. The big winners were oil companies. The three largest U.S. oil companies all reported growth in third quarter profits in excess of 50 percent.

Now, with a slowdown in the growth of economy in China, the world’s second largest oil consumer, demand is fading. At the same time, fears of a disrupted oil supply have not materialized. In fact, exports from Iraq’s oil fields jumped 7 percent to 1.84 million barrels last month, the highest level since the U.S. invasion.

Future oil prices will be influenced by who won Tuesday’s presidential election. PFC Energy, a Washington consulting firm, predicts oil will cost an average of $48 a barrel in 2005 if President Bush is re-elected vs. $43 a barrel if John Kerry wins.

One reason is that Sen. Kerry has pledged to stop supplying the Strategic Petroleum Reserve while the price is high to allow for more oil on the open market. The Bush administration has refused to release oil from the reserve to reduce prices and is moving ahead to meet its target of having 700 million barrels in the underground caverns.

The men also differ on energy policy. While both want to reduce U.S. reliance on foreign oil, President Bush aims to do so by increasing domestic supplies and Sen. Kerry focuses on cutting demand. The president would increase U.S. oil production by allowing more exploration and drilling on federal land, including in the Arctic National Wildlife Refuge. Sen. Kerry calls for more fuel-efficient vehicles and appliances and more us of alternative energy.

Energy experts say that neither approach will do much to decrease the need for foreign oil, which is cheaper to produce, but they agree that conservation can reduce prices.

Something to think about when filling the Hummer with $2-a-gallon gasoline.