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Beutel: Energy Crunch, Fed Action Threatens to Send Economy into 'Stagflation'

Aired January 4, 2001 - 1:37 p.m. ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

LOU WATERS, CNN ANCHOR: An electrical shortage in California, high home heating oil prices in other parts of the country.

To talk more about that, Peter Beutel. He is an oil analyst and a president of the oil research brokerage firm Cameron Hanover. He joins us from New York.

What affect, Mr. Beutel, have the high home heating oil prices had on the Fed's decision to lower their interest rates?

PETER BEUTEL, OIL ANALYST: Well, I think that the higher oil and energy prices are the main reason that we are even looking at an economic slowdown. If people are paying $50 more a month fro gasoline, for heating, and for electricity, that's $150 per household that they don't have to spend somewhere else.

WATERS: What -- what, of the efforts last fall of Energy Secretary Richardson, and emptying part of the oil -- Strategic Oil Reserve to help out with these home heating price. What effect, if any, did that have on any of this?

BEUTEL: Tapping the Strategic Petroleum Reserve probably prevented us from going another $10 higher, over $40 a barrel. So it was a good thing. But even so, it still has not stopped the economic slowdown yet.

WATERS: President Clinton, last week, offered funds up to help folks pay their home heating bills. Good move?

BEUTEL: Well, I think that it's going to help them, and obviously these people are at risk. The thing that I am most worried about at this point is whether we are going to see a return to stagflation.

WATERS: Explain that term.

BEUTEL: Well, a combination of inflation and poor economic growth. When the you see the Fed lower interest rates as quickly as it has, we have not given energy prices a chance to come back down. What I would like to see, in some respects, is to see the demand drop so that OPEC has to start competing with itself for market share. If we see that, we get lower energy prices, and then we go through an economic boom. The correlation between energy prices and the economic good times is so tight it's unbelievable.

WATERS: Now, if business is making fewer widgets because of the business slowdown, that will create less demand for oil, will it not?

BEUTEL: Yes, it would, but the fact that the Fed lowered interest rates yesterday, may have preempted the natural cycle for getting us to that point.

WATERS: What about George W. Bush, and his affect on energy now? You know that is one of his big pushes here. I believe he calls it U.S. energy security, less dependence on oil from overseas. His plan to drill in some of the wildlife preserves up north in this country. Good thing, bad thing?

BEUTEL: Well, I think there are certain good aspects to it. I think really what we need to see is continued devotion to this. What the history, through both parties, has been is that we face the crisis and then we forget it and move on. If we can keep our attention focused on it, it would be a good thing.

WATERS: The Strategic Oil Reserve, have we been operating that properly, do you think?

BEUTEL: No, I don't. I think we should be using it as a dynamic instrument. When we saw prices get down to $10.96 in 1998, December of that year, we should have been buying to keep U.S. producers in business. When we got that low, we lost $400 barrels a day of U.S. production.

The problem here is, really, that in the '70s, when we last had a real big problem, we were importing only a quarter of our oil. Now that figure is closer to 65 or 70 percent.

WATERS: What about the necessity being the mother of invention, the alternative energy sources for the auto industry and other industries?

BEUTEL: Well, we need to see higher prices before some of these become viable. I don't think we have really been at high enough levels yet, where we will see that come in. The problem, though, is that when you go through an incredible amount of economic dislocation before you get to that point. Of course, we're using oil now, because well oil in the 1850s was too scarce to find.

WATERS: Peter Beutel, oil analyst, thank so much.

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