Tom talks with Philip Verleger, president of energy consultants PKVerleger, on oil and the economy
Phil, what will oil do?
I approach oil from the macro point of view, and I'm quite pessimistic as to the economic outlook for the U.S. This depression probably will look more like what historians call the long depression of 1873. It lasted about 70 months. Growth did not plunge like in the '30s, but it was terrible. And if you dig through the data, you find energy prices just plunged.
What's coming for oil in the short run, over the next quarter or two?
I think we will probably trend down towards $60, but I do not see anything collapsing in the third quarter. My guess is prices really fall dramatically—if they are going to fall—in January, February, and March because that is when I think we're going to see the full impact of the housing situation. If we have a seriously hung Congress, there is the potential for a real catastrophe.
What is housing's impact on oil?
We always talk about the summer driving season. Well, it turns out it is the summer construction season that counts. If you go back and look at the data over the last 20 years, it is construction that really produces the extra gasoline demand. Construction workers do not drive Smart cars, they drive trucks. So with housing starts falling below 500,000 units instead of 2 million, and with the slowdown in commercial construction, roughly half a million barrels a day have been taken out of U.S. demand. That demand is not going to come back until we work off this inventory of housing.