Oil Cost, Anxiety Are Both Rising
Oil prices briefly topped $49 a barrel Friday, and the specter of $50 crude renewed concerns that an already slowing economic recovery could be hobbled.
That prospect gave energy new prominence in the presidential campaign, with Democrats on Friday stepping up attacks on President Bush’s energy policies.
The benchmark U.S. grade of crude oil hit a record $49.40 before falling back to close down 84 cents at $47.86 on the New York Mercantile Exchange. The price ended the day 34% higher than just two months ago, and 54.6% higher than a year ago.
The retreat, attributed to a pause in the fighting in Iraq, came after a weeks-long record-breaking streak. That led stock traders to hope the worst was over and sparked a rally on Wall Street. But some energy analysts said still higher crude prices were inevitable, because of short-term speculators feeding on terrorism fears, global political instability, supply limitations and relentless demand.
Although oil costs less now than in the 1970s and 1980s when adjusted for inflation, the $50-a-barrel barrier is seen as psychologically important, and many economists say crossing it would pose a hazard. Even if $50 is never breached, the global economy has already moved to an expensive new neighborhood.
“We’re not going to see $18-$20-$22 oil. Those days are over,” said Michael Fitzpatrick, vice president of energy risk management for commodities brokerage Fimat USA Inc. “We were living in a fantasy world here for years, and now we’re having to face reality.”
Oddly enough, as crude oil prices have soared recently, gasoline has become cheaper. In California, pump prices have fallen for 11 straight weeks. Behind the apparent contradiction is an all-out production push by gasoline refiners and a softening in demand by motorists.
Nationwide, steep petroleum prices have curbed spending by consumers -- particularly those in lower-income households -- who also have been hit by stiff health costs, job insecurities and sluggish wage growth. Fuel-dependent industries such as airlines and trucking have been hammered.
“We’re hearing about small trucking companies closing up shop,” said Bob Costello, chief economist at the American Trucking Assn. “At these prices, I don’t know how any company can exist.”
Gasoline prices, when they were higher, may have slashed a half percentage point off the economy’s growth in the second quarter, which slowed to an annual rate of 3%, down from 4.5% in the first three months of the year, said Steven A. Wood, chief economist for Insight Economics in Danville, Calif. Expensive oil was partly blamed for the measly 32,000 net jobs created nationwide in July.
Treasury Secretary John W. Snow said Thursday that energy prices were creating a “headwind” for an otherwise strong U.S. economy, acting like a tax on consumers and businesses.
Allen Sinai, chief global economist for Decision Economics in New York, said, “What was once a healthy U.S. and world economy is getting buffeted now by oil.”
Some economists have raised the prospect of stagflation, a combination of stagnant growth and high inflation. Stagflation, triggered largely by oil price shocks, was a major drag on the U.S. economy in the 1970s.
And oil price spikes helped trigger the U.S. recessions of 1990-91 and 2001.
But the economy today is viewed as hardier. Interest rates, for example, are near generational lows. For that reason, an oil-incited recession is unlikely, said Anirvan Banerji, research director for the Economic Cycle Research Institute, whose leading economic indicators correctly predicted the last two U.S. recessions.
What’s more, gasoline accounts for a lower percentage of household expenditures than a decade ago, thanks in part to increased energy efficiency, and that allows some consumers to better absorb price spikes.
Some don’t even care. “I love to drive,” said Dex Tompkins, 42, a printer from Ballard, Wash. “Gas would have to go up to $10 a gallon before you’d catch me on the bus.”
Fortunately for Tompkins, U.S. gasoline prices have been on the decline, with the average slipping 0.2 cent last week to $1.875 a gallon, according to the U.S. Department of Energy.
The retail reprieve might not last. In September and October, pump prices will “be moving up” even if crude were to fall back to $42, said John Segner, lead portfolio manager for Invesco’s energy mutual fund. And if oil prices stay near $50 a barrel, he said, gasoline prices could surpass the U.S. record average for self-serve regular of $2.064 a gallon set May 24.
Mark Baxter, director of Southern Methodist University’s Maguire Energy Institute, was more pessimistic. “We’re just easily one major disruption away from $60 oil,” he said, “or possibly $3-a-gallon gasoline.”
Terrorism fears, supply disruptions and political instability in major oil producing countries are adding $10 to $15 to the price of crude, analysts said. But they said that even if those nemeses were eliminated, the price still wouldn’t drop much below $35 per 42-gallon barrel.
That’s because global demand has exploded with the emergence of China and India as economic powerhouses while production has peaked, with little room for major suppliers such as Saudi Arabia to boost output.
For the president, that reality could become a political liability.
“If high oil prices were Olympic events, George Bush would win medals. He’s fiddling while Rome is burning,” Sen. Charles E. Schumer (D-N.Y.) said Friday in a statement that was part of the escalated attacks by Democrats.
There probably isn’t much any politician could do to drive down oil prices quickly. Democratic presidential candidate Sen. John F. Kerry (D-Mass.) has called for decreasing energy consumption and boosting development of alternative fuels, while Bush has made increasing oil production from Alaska a cornerstone of his energy plan. But analysts say neither prescription offers much price relief in the short term.
One policy decision could provide some short-term relief: releasing oil from the nation’s Strategic Petroleum Reserve.
The reserve, in salt caverns along the Gulf Coast, stands at more than 666 million barrels, and 100,000 barrels are being added every day toward the capacity limit of 700 million barrels.
Kerry has called on the administration to stop filling the reserve, at least until prices subside. White House Press Secretary Scott McClellan said Friday that the reserve was “not there to manipulate prices for political purposes. It is there for national emergencies or in the event of a severe disruption of supply, in order to protect consumers and our economy.”
Administration officials say that halting reserve purchases wouldn’t make much of a difference anyway, given that they represent a tiny fraction of daily U.S. oil consumption of about 20 million barrels.
Others, however, say halting purchases or releasing supplies could have a psychological effect, at least in the short term, in a market driven by speculators.
“President Bush is the only person in the world who can break this cycle of fear and anticipation and greed ... by releasing oil from the Strategic Petroleum Reserve or by just telling the world that if things don’t improve we will step in,” said Fadel Gheit, senior energy analyst with Oppenheimer & Co. “If he releases between 1 and 2 million barrels per day for the next 30 days, I guarantee you that oil prices will go back to $30.”
Times staff writer Edwin Chen in Crawford, Texas, and researchers Lynn Marshall in Seattle, Lianne Hart in Houston and Rennie Sloan in Atlanta contributed to this report.
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Oil effect
As oil prices rise . . . Crude oil for near-term delivery, New York price per barrel 2001: $28.66 2002: $19.44 Friday: $47.86
. . . the economy can slow Gross domestic product, percentage change each quarter 2001: -0.5% 2003: 7.4% 2004: 3.0%
Sources: Commerce Department, Bloomberg News
