Posted: December 05, 2008, 2:31 PM by Jonathan Ratner

Bad news for oil companies could be good news for commuters and consumers but the longer-term impact of weak oil prices remains a big question mark.

On Thursday, Merrill Lynch warned that the price of oil could dip below US$30 per barrel if China gets hit by the global recession and OPEC fails to respond by cutting output. It predicted that crude would average US$43 in the first quarter, US$45 in the second, and then climb to US$56 in the second half of 2009 and US$70 in 2010.

This came the same day as Gulf Oil CEO Joe Petrowski told business leaders that oil could dip US$20 and gasoline prices in the U.S. could fall to a buck a gallon early in 2009.

RBOB gasoline futures on the Nymex, which hit a high of US$3.63 in July, recently closed at 98¢ – the first time they’ve fallen below a dollar since they began trading in 2006, according to Phil Flynn, analyst for Alaron Trading in Chicago.

“Now it is possible that we will see retail gas prices at some point follow suit,” he said in a report. Recent figures have retail prices at US$1.81 per gallon, down US$1.25 from a year ago, he added.

If gasoline is to fall another US80¢, Mr. Flynn said it is going to have to start with crude oil, which closed at its lowest level since 2005 this week. U.S. oil demand in November also saw its biggest decline since 1981. “Even if prices fall and gas demand increases, prices of gasoline will not spike like they have in the past,” he added.

Mr. Flynn also cited a Wall Street Journal report that said oil producers have less incentive to invest as their margins get crushed, while Sanford C. Bernstein & Co. puts the industry’s average break-even cost range at US$35 to US$40 a barrel.
“The danger is that when demand does bounce back, prices will boomerang far higher because the supply cushion has shrunk,” the report said.

Jonathan Ratner