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Oil companies fail to pass on price drops at the pump

Video by Sophie DAVIDSON

Latest update : 2008-12-07

The global economic crisis has pushed the demand for oil down and sent its price spiralling from $146 per barrel in July to just over $40 on Friday. Yet oil companies have not passed on the cuts to the consumers.

REUTERS - Oil dropped more than 6 percent to a four-year low on Friday after a U.S. report showed the heaviest job losses in 34 years in the world's top energy consumer.

U.S. employers axed payrolls by 533,000 in November, the weakest performance since 1974, adding to a crush of dour economic and demand data that has sent crude spiraling down from highs over $147 a barrel in July.

U.S. crude plunged $2.86 to settle at $40.81 a barrel, the lowest settlement since Dec. 10, 2004, after touching $40.50 earlier in the session. London's Brent crude settled down $2.54 at $39.74 a barrel.

"This translates, irrefutably, into further and severe contracting demand," John Kilduff, senior vice president at MF Global in New York, said in a research note.

"Conventional wisdom now holds that there will be a test of the $40 level fairly soon, perhaps even as soon as today."

U.S. stock markets turned higher in late Friday activity as investors bet lower oil prices would help shore up consumer spending and ease business costs.

China and India, two main drivers behind oil's six-year rally, moved to cut domestic prices for the first time in nearly two years, curtailing refinery profits to help stimulate growth in their flagging economies.

Analysts have slashed price and demand forecasts on the mounting economic gloom, with Merrill Lynch predicting oil could drop to $25 a barrel if the global recession extends to China.

Asset manager Jacques Mechelany of Bank of China (Suisse), who predicted crude would drop to $50 during its peak in July, said prices could hit $20 a barrel in 2009 as cratering U.S. demand outstrips Chinese growth.

The International Energy Agency lowered its forecast for global annual demand growth to 1.2 percent from 1.6 percent in its previous forecast, with increases from China and other emerging economies outweighing loses in developed markets.

The rapid, steep retracement of oil prices has prompted OPEC members to call for increasingly strong action when the Organization of the Petroleum Exporting Countries meets next, on Dec. 17 in Algeria.

OPEC President Chakib Khelil told Algerian state television on Thursday that the oil-producing group should cut oil output by a significant amount at the meeting if prices remain at their current level.

The cartel has already agreed to slash supplies by 2 million barrels per day (bpd) to help prop up prices.

Date created : 2008-12-07