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Oil Prices Fell, But Should Fall More

August 06, 2008 11:19 AM

ABC News's Bianna Golodryga reports: Oil prices fell Tuesday to below $120 a barrel --  some $26 off of its highest level. That and a decision by the Federal Reserve to keep a key interest rate steady lead to a big rally on Wall Street Tuesday.

Neil Cavuto, of the Fox Business Network, said today on "Good Morning America"  that although prices have dropped, they should come down even more.

Apg_oil_rig_080806_main “What's been happening is something of a run-up very akin to the run-up we had in real estate prices and the run-up we had in Internet stocks years before. It was a frothy mentality that didn't justify simple supply and demand,” Cavuto told Diane Sawyer. “Having said that, I'm not smart enough to think these levels are where we stick, but many people far smarter than I have said that a realistic price for oil is probably under $100 a barrel, so we have a way to go.”

Oil was just part of the picture. There was plenty of good news and bad news behind the stock surge.

The Fed kept interest rates unchanged, despite the threat of inflation, because there's a growing fear that the U.S. and global economies are slowing. A slowing economy would, in theory, demand less oil. As for the Fed's dilemma: Raise rates to fight inflation, which, by the way, would most likely bring us into a recession if we're not there yet, or keep rates steady but raise the risk of dealing with a major inflation problem down the road.

The Fed chose to go with option A. Only time will tell if it made the right decision -- or rather, the lesser of two evils.

But I promised you good news, and here it is. Lower oil prices and interest rates are good for consumers. Who, despite what they may be telling pollsters about their feelings toward the economy, continue to show resilience. Consumer spending was higher than expected for June, and consumer-driven Proctor & Gamble reported better than expected earnings.

Ap_gas_080730_mnSkeptics may attribute that to those rebate checks, and thus the continued spending patterns for consumers may be different in the coming months. But one thing is for sure: If oil and gas prices continue to fall, then the consumer will have more wiggle room to continue spending money.

As for the sentiment among traders on the floor of the New York Stock Exchange, well, they are just waiting to see where the day takes them, with little earnings or economic news on tap today. As to where oil prices are headed -- between Iran, hurricane season, and economic data -- it's a total crapshoot. But as for what can be expected from the Fed, well, that's a bit easier to read.

In his morning note, Art Cashin, head floor operations for UBS, wrote that the markets "saw through the charade the Fed had employed. For all the statements blustering about inflation, there was only one vote in dissent. If the FOMC was really so concerned about inflation, one might have expected two or even three dissents."

And with a rate hike out of the cards for the near term at least, expect the major focus for the next few months to continue to be oil.

August 6, 2008 | Permalink | User Comments (10)

User Comments

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Wait a minute here! You mean that Big Oil is not controlling the prices afterall? I thought Bush was in the pocket of Big Oil and that the likes of Exxon will make another record breaking profit for this quarter? Perhaps the real truth is that supply and demand do have an influence on a commodity???

Posted by: Frustrated Voter | Aug 6, 2008 12:00:53 PM

Why is it that when the price of oil would go up a buck the price of gas would go up 10 to 15 cents a gallon. oil has fallen $26 a bbl. and the price of gas has dropped about 10 cents a gallon. What gives?

Posted by: John Walker | Aug 6, 2008 1:46:01 PM

I am a firm believer that simply converting to hydrogen fuel cell automobiles is the answer to all America's needs. Economically it would spur the automotive industry, clean the air of pollution, create jobs, shift the balance of wealth and advance technology. By simply maintaining America's money within our economy it will create wealth by completing the money cycle within out economy!!!

Posted by: Ray Fisher | Aug 6, 2008 2:22:41 PM

We are in a !@#$$% reccession! You morans!! I am so sick of the lies !!! Bush can go to hell!

Posted by: DEE | Aug 6, 2008 2:25:17 PM

Finding an alternative solution to our fuel problems is definately the answer but who is to say that whomever comes up with an alternative solution, such as hydrogen fuels,bio-fuels or whatever won't bleed us dry for that too!

Posted by: Dawn Jezalik | Aug 6, 2008 5:04:41 PM

I know, I live in Texas and at least you people don't have to live around these G.O.P. war mongers driving their large S.U.V.'s makes me wanna puke.

Posted by: JJ | Aug 6, 2008 5:48:14 PM

Frustrated Voter wrote: "Wait a minute here! You mean that Big Oil is not controlling the prices afterall? I thought Bush was in the pocket of Big Oil and that the likes of Exxon will make another record breaking profit for this quarter? Perhaps the real truth is that supply and demand do have an influence on a commodity???" +++++ That's a gross oversimplification and you know it. Bush say Gadhafi's no longer a terrorist - even though he held French medical workers for ramsom last year because Big Oil said they wanted in on Libya. Bush pushed the Feb. 2007 lucrative 30-year concessions for Big Oil through the Iraqi parliament - prompting a British politician to remark "So instead of a war from weapons of mass destruction we had a war for weapons of mass production." Bush is now calling to end the ban on any offshore drilling even though his own Energy Information Administration says it won't affect prices. He did not renegotiate lease agreements: when oil was $40/barrel, Americans got $6 for letting the companies take publicly owned oil out of the ground. When the price went to $140 Americans got 25 cents of that extra $100. And yes the "likes of Exxon will make another record breaking profit for this quarter". So, please, explain how someone not in Big Oil's pocket behaves that way?

Posted by: Mickey | Aug 7, 2008 3:07:05 PM

I can't wait till Gas goes below $3.00/gal. We then get to hear all the whinning about trading thier escallades in for a Prius... and got ripped off on the trade in... Glad I kept my Truck

Posted by: RealDemocrat | Aug 7, 2008 4:56:46 PM

if oil prices are down how come im still paying over $4.00 a gallon. these oil companies are still sticking it to us. thesen people are a disgrace to the country, and so are the politicians both republican and democrat for letting oil companies get away with this rip off. all you here from them is what they will do for us, but nothing ever gets done. tell me who spends millions of dollars to get a job that pays only pays a few hundred thousand a year for possibly only four years. some body has there hands in the cookie jar.

Posted by: roy | Aug 8, 2008 10:11:54 AM

WE need real change in Goverment. Bush and his friends GREED is distroying this Country.They don't seem to care. They think all is wonderful. What world do they live in. I'LL TELL YOU THE RICH AND THE GREEDY.It's not them leaving from pay check to pay check. I've never in my 53 years had it so bad.
I Also am a firm believer that simply converting to hydrogen fuel cell automobiles is the answer to all America's needs. Economically it would spur the automotive industry, clean the air of pollution, create jobs, shift the balance of wealth and advance technology. By simply maintaining America's money within our economy it will create wealth by completing the money cycle within out economy!!!

Posted by: Trudy | Aug 28, 2008 9:49:15 AM

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