The swift drop in oil prices in recent weeks may have motorists cheering, but the financial world is in a tizzy over whether there is a larger meaning behind the shocking plunge in the commodity that greases the global economy.
"The thing you have to worry about when you have a precipitous drop like this is it could be signaling bad things for everybody," said Phil Flynn, senior market analyst at Chicago-based Price Futures Group. "That's the big concern."
American motorists are saving about $80 million a day, thanks to a 20-cent-a-gallon drop in the price of regular gasoline since Oct. 1.
Business like lower oil prices, too. But if companies think the decline portends an economic slowdown, the firms may rein in spending and hiring. Those fears can spread into recession.
The long-running bull market is already under pressure from the Federal Reserve raising interest rates, from tariffs between the United States and China, and from a sell-off in technology stocks.
Continued pressure on oil prices could drag stocks even deeper.
Stocks declined again Wednesday, with the Dow Jones industrial average dropping 205 points. The blue-chip barometer is 7.48 percent off its all-time high on Oct. 3. The Nasdaq composite is down 12.7 percent from its Aug. 30 peak. The S&P 500 is 8.7 percent below its Sept. 21 record.
Flynn rated the six-week oil price pullback "a minor bust."
Benchmark Brent Crude and West Texas Intermediate both saw price increases on Wednesday, snapping a 12-day losing streak. Brent was $65.70 per barrel, up 0.41 percent on the day. West Texas Intermediate closed at 55.86, up 0.36 percent. Each is down more than 20 percent from their highs in the beginning of October.
The magic number is $50 per barrel.
"We are clearly in the 'danger zone,' " said Frank Verrastro of the Center for Strategic and International Studies. "For U.S. producers, sustained prices below $50 would undoubtedly be problematic for all but the most efficient operators."
The International Energy Agency two days ago issued a report that trimmed its forecast for oil demand growth in 2018 and 2019, citing weaker economic outlook, a China slowdown, trade concerns and even higher oil prices.
Several experts echoed Flynn, saying said the current oil price pullback is temporary and they expect Brent and WTI to settle in a range of $50 to $80 longer term.
"That is the band where neither consumers nor producers are hurt," said Bob Tippee of Oil & Gas Journal. "There is some of a swoon right now. This is the kind of gyration that is part of market psychology. The market is fundamentally softening. Demand growth has slowed."
Energy analyst Pavel Molchanov of Raymond James sees oil prices toward $100 a barrel by 2020.
"The big picture is very bullish," Molchanov said in a recent interview.
The current surplus is largely attributed to a miscalculation between demand and major producers, including Iran. A strong dollar is also weighing on oil prices because it makes oil more expensive to much of the world. Oil prices tend to fall as a result.
Oil is a boom-and-bust business. The price drops when supply exceeds demand. Producers pull back and slow production as a result of the price squeeze. When demand exceeds supply, producers start drilling again and the cycle picks up again.
The rub is the length and depth of the downcycle. The Houston oil crash of the 1980s after a collapse in oil prices is often cited for its severity. It flattened the city's economy, vaporized more than 200,000 jobs and emptied office buildings and wreaked havoc in the financial sector. The region took years to recover.
The United States is the world's biggest oil consumer at about 21 million barrels a day of 100 million barrels produced daily across the globe. It is also a top oil producer, thanks to the shale oil renaissance over the last half-decade.
Oil and gas represent about 7.6 percent of gross domestic product. Oil prices touch everyone. Low oil prices have a salutary effect across the economy, including moderating the rate of inflation. By helping keep inflation low, oil can help stem the rise of interest rates, mortgage rates and auto loans.
"Energy costs have a pervasive impact across the entire value chain of the U.S. economy," said Dean Foreman, chief economist for the American Petroleum Institute.
Some worry that the current cycle could be a replay of 2014 through 2016.
Starting in mid-2014, oil prices began dropping from $80 per barrel into the $20s after oil giant Saudi Arabia drove down oil prices, thereby squeezing U.S. producers.
"It was a major crash signaling a slowdown in the global economy," Flynn said. "We had Brexit, a slowdown in Europe. Big Oil had some of their worst years ever."
It took years for oil producers to exhaust the supply overhang with disciplined production limits. Only in the last year or so did prices recover to a level where producers could make healthy profits without incurring the wrath of consumers.
The good news is that pump prices have dropped 20 cents in the past six weeks, from $2.88 per gallon for regular gas to $2.68, according to the American Automobile Association.
That savings is fattening consumer pocketbooks as the holiday season approaches. Dollars that would have gone to oil and gas companies will instead be spent at retailers from home repair giant Home Depot to Macy’s to restaurants, hotels and online giant Amazon.com (led by Washington Post owner Jeff Bezos).
“Today the national average is about 30-cents less than the summer’s highest pump price,” said Jeanette Casselano, a spokesperson for the American Automobile Association. “Combine that savings with the sustained strong economy, and Americans will have more change in their pocket to spend around the holidays.”