Wednesday, December 17, 2008

Crude Oil prices fall after Fed announcement

The price of light, sweet crude for January delivery fell about 91 cents, or 2 percent, lower to $43.60 per barrel on the New York Mercantile Exchange. Immediately after the Fed announcement, prices dipped as low as $42.70 per barrel.

The Federal Reserve announced yesterday that it is cutting its interest rate for interbank lending from 1 per cent to between zero and 0.25 per cent. At this point, there is obviously no more cutting left and this was considered a very bold move by many. With the rate cut, the Fed also said that economic conditions "are likely to warrant exceptionally low (rate) levels for some time." Since there is no more room left to cut, the Fed will now have to act through "quantitative easing", which means they will add to the money supply in the form of loans to spur the credit markets, etc.

Meanwhile, OPEC has agreed to a production cut of 2 billion barrels per day, which analysts believe is the necessary reduction for the current lowered demand. While these analysts are probably correct, OPEC is more interested in halting the decline in value of a barrel of oil and cutting the supply usually is a good counter measure.

How low will the price of a barrel drop? Have we hit bottom? In the United States it looks like it will be some time before the economy can be turned around and I foresee demand falling even lower and prices at the pump getting smaller. Regular unleaded in central Ohio this week is around $1.53 per gallon. What is it in your neck of the woods?

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