Oil prices --- John Fellmy --- Chief Economist --- American Petroleum Institute
>> welcome back. high oil prices may begin to slow economic growth earlier, erin burnett spoke with john fellmy, chief economist for the american petroleum institute, about his forecast and where oil prices are likely headed.
>> it’s going to come down to what happens with supply. iraq, venezuela, and nigeria, even norway, and then what happens with demand. we’re seeing very strong demand coming out of areas like china, so it’s going to be a function of all those factors.
>> now, a couple of issues within that, and you’re talking about growth in demand from china. recently opec has boosted its expectation in terms of oil demand in the quarter, but at the same time, we’ve been hearing that global growth expectations are actually being cut back. explain to me how that works.
>> well, because of higher oil prices, we’re seeing a drag on world economies. in the u.s., for example, probably 2/3 of the slowdown in the economy has been a function of higher oil and natural gas prices. so oil and energy really do adversely affect the economy when they grow up.
>> so, as oil prices rise and the economy slows, why are demand forecasts for oil at the same time rising?
>> because even with the higher oil prices, we’re still seeing net positive economic growth. here in the united states, we’ve got such a stimulative fiscal policy and positive monetary policy.
>> so in terms of your forecasts for oil prices, what is the recession point? i mean, that’s the big talk on wall street right now, whether we’re going to have a recession or not due to these oil prices. what are your internal numbers say? is there any sort of a threshold oil price at which the energy industry believes that a recession is high risk? >> well, if you look at historical patterns, we probably have to see oil prices go up well over $80 a barrel before you would offset the stimulus that we’re experiencing right now from fiscal and monetary policy.
>> so you’re saying we can sustain these prices, anything up to $85 a barrel without you being concerned that a recession is going to be the byproduct.
>> well, as an economist, we’re always concerned about recession, but at this point we’ve got such powerful stimulus and such strong economic growth that it hasn’t been offset by the higher oil prices.
>> want to talk to you about one or thing, because at the top you mentioned supply and demand and how that was really going to be the―what was going to drive oil prices. but there’s another issue in here, and that’s the issue of capacity. i mean, there could be plenty of supply in the ground, but people say there just hasn’t been the investment in getting that oil out of the ground, and that’s really what is causing the problem right now. what do you think of that?
>> well, we had lower levels of investment in 1999, 2000, 2001 as a result of lower oil prices. now we’re seeing substantial investments, most estimates are we’re investing over $50 billion a year in the united states.
>> do you think we’re going to get a ramp up from some of the companies that you represent, exxonmobil, chevron? is this long-term higher oil trend in prices going to encourage them to increase their exploration and production budget? >> there’s no question that higher oil prices will stimulate increased investment. so we’ll have to see.
>> how much do you think is needed in terms of that investment, say, over the next decade? i mean, i know some economists at goldman sachs are saying we need $2.4 trillion of money invested in exploration and production over the next decade. do you think that that sort of number is right, or is that off base?
>> oh, i think it’s clearly in that ballpark. i think that we could clearly see more investment in that order.
>> that was john fellmy, chief economist of the american petroleum institute, speaking with our erin burnett. well, toys r us shares closed higher on the day. the world’s largest toy store chain reported a second quarter profit of $61 million after a tax gain compared to a loss a year ago. year to date, shares are up 27%. overall, revenue fell 4%, and countries crew john eiler described the second quarter as “very challenging” for the toy industry. toys r us had $147 million in markdowns to liquidate inventory. up until 1998, it was the leading toy store until wal-mart took over that role. and the company was able to sell more low-priced items back then, forcing toys r us to cut prices.
