Oil under $100? Lower, but not low enough

By Nick Carey - Analysis

CHICAGO (Reuters) - Oil still costs too darn much.

Crude has fallen more than 25 percent to below $110 per barrel from its all-time highs, and some economists even predict it could dip to $80 within months.

But if $110 oil provides some relief for U.S. consumers at the pump -- and $80 promises even more -- it's still too high given that they are already struggling with everything from rising food costs to tighter credit and sliding home values.

"American consumers have a lot more working against them right now than just expensive gas," said Peter Schiff, president of money manager Euro Pacific Capital. "The problem with trying to sell something to the American consumer at the moment is that they are flat broke."

"And the price of gas is still way above where it was a couple of years ago, so it's not like Americans are paying bargain prices right now," he added.

Economists and analysts say the multiple problems facing U.S. consumers mean that even if oil falls to $80, a healthy peak holiday season is unlikely for retailers like Best Buy Co Inc, Wal-Mart Stores Inc and Sears.

And it is just as unlikely that auto makers such as Ford Motor Co or airlines like AMR Corp's American will roll back dramatic changes to business plans made as oil sprinted to an all-time high of $147.27 on July 11.

Some economists warn that oil is falling in part due to the slowing global economy. This would be bad news for U.S. exports, a major contributor to the 3.3 percent growth in U.S. gross domestic product in the second quarter reported by the U.S. Department of Commerce on August 28.

"This is a double-edged sword," said Donald Straszheim, vice chairman of Roth Capital Partners, who predicts oil will fall to $80 within six months. "The reason the price of oil is falling is not because there have been any major oil finds, but because there aren't enough consumers to sell to.

"The markets are grasping at straws if they think the decline in oil prices will serve as a magic potion for the problems facing the banking sector and the economy," he added.

HOW LOW CAN YOU GO?

According to the U.S. Energy Information Administration, average U.S. retail gasoline prices fell more than 10 percent to $3.74 in the week of August 25 from a record high of just under $4.17 in the week of July 7.

But that is still up more than 18 percent from the beginning of the year and nearly 34 percent above August 2007.

"Who would have thought a year ago that the prospect of oil at $100 would be celebrated?" said Diane Swonk, chief economist at Mesirow Financial. "That price still adds insult to injury for American consumers, even if it's less painful than it was."

Swonk added that despite the recent decline in oil, she still predicts a fourth-quarter decline in consumer spending because of the other challenges facing ordinary Americans.