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Wednesday, September 20, 2006

Declining Oil Prices

The decline in oil prices is good news, isn't it? Well if it relflects an increase in supply it is, but if it is as a result of slowing economic growth then the news may not be as welcome as it seems. That is the subject of this article:

It should only be this simple: Oil prices plunge 20 percent, leading businesses and consumers to ramp up their spending, which gives a nice jolt to the economy. That seems to be the conventional wisdom on Wall Street right now, where the pullback in energy prices is being cheered by investors. But some contrarians think that view could be missing the point.

While the decline in prices will provide some relief to motorists, it also reflects the country's weakening economic outlook. In other words, any benefit from falling pump prices may be outweighed by higher interest rates and a stagnating real-estate market.

Moreover, the economy did not crater in the face of soaring fuel prices — because energy costs are only a small portion of the average U.S. household budget — so why should the reverse be true?

"Lower oil prices don't mean that the economy is going to improve," said David Resler, chief economist at Nomura Securities in New York.

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