July 17, 2008 – IR Summary/NYT – The price rise in petroleum products have dual impact, both negative and positive, on one side it has shaken the world and have compelled the oil consumers to go for less consumption as far as possible, and on other the oil producing countries can’t escape this alarm, they shall be equally affected, and unless they revise their prices downwardly, time comes when their own survival shall be at risk, the alternative fuel shall soon start taking its course.

Concerns about a slowing economy and rising inflation pushed oil prices down sharply for a second day on Wednesday, an unusual dip in the oil price rally that began more than six years ago.

The two-day decline totaled more than $10.50 a barrel, but analysts cautioned that it was still unclear how far prices would fall and that the respite may be temporary.
The drop in oil price contributed to a jump on Wall Street, with most major markets rising more than 2.5 percent. Investors were also buoyed by news that Wells Fargo planned to increase its dividend, easing some concerns about the stability of banks.

The drop in oil was also caused by new evidence that Americans were driving less because of gas prices, which hit a record of $4.11 a gallon, according to a nationwide survey by the motorist group AAA.

Gas prices have jumped 35 percent in the last year and were a big reason inflation rose 1.1 percent in June, the government said on Wednesday.

That increase caps a year in which inflation has surged to proportions seen by some as threatening the stability of the American economy. In the last 12 months, the Consumer Price Index has risen 5 percent, the biggest annual jump since May 1991.

“The U.S. economy is becoming weaker and is unable to sustain oil consumption at these prices,” said James Crandell, a commodity analyst at Lehman Brothers. “But it is still too early to call this a tipping point because of some major risks we might face this summer, like hurricanes or geopolitical events.”

The concern about rising costs was echoed by Ben S. Bernanke, chairman of the Federal Reserve, who provided a bleak assessment of the American economy over two days of testimony to Congress, warning that inflation posed a significant risk to the nation’s economic outlook.

Mr. Bernanke told lawmakers Wednesday that he saw increased risk of inflation. “The rising prices of energy and some other commodities have led to a sharp pickup in inflation,” he said, “and some measures of inflation expectations have moved higher.”

The Consumer Price Index report, released Wednesday, reinforces what many economists, including those at the Fed, have warned about for months: Americans are being forced to pay significantly higher prices, even as the job market weakens and big employers announce plans to lay off thousands of workers.

“There’s not enough lipstick to put on this pig,” said Richard Moody, an economist at the real estate firm Mission Residential. “No matter how one slices and dices the C.P.I. data, the bottom line is that U.S. workers are falling farther and farther behind.”

A weekly report by the Energy Department showed that commercial oil inventories, which were expected to fall, rose instead last week as more oil went into storage rather than being refined and sold at the pump.

Oil futures fell $4.14, or 3 percent, to $134.60 a barrel on the New York Mercantile Exchange. That followed a $6.44 drop on Tuesday, the biggest one-day decline since 1991. Last week, oil reached a record, during trading hours, above $147 a barrel.

Some analysts said oil prices might have reached a peak last week, with big customers like airlines and refiners balking at paying close to $150 a barrel.
“We’re definitely seeing a turnaround in the market, at least in the short term,” said David Kirsch, an energy analyst at PFC Energy, a consulting group in Washington. “A lot of quarters are concluding that oil is just too expensive, particularly in this economic environment.”

But while demand is falling in the United States and Western Europe, oil consumption is still expected to rise this year because of growth in China, India and the Middle East. That growth still provides a floor for oil prices.

The drop in prices was exacerbated by easing geopolitical tensions that had sustained last week’s gains, particularly surrounding Iran, OPEC’s second-biggest oil producer, as well as more positive news from Nigeria, where production resumed after recent interruptions. Full