There’s No Easy Answer on Oil
Why are oil and gasoline prices so high, and will they stay there?
A long list of factors -- from tight supplies globally to fears about more Middle East unrest -- have combined to lift crude oil prices to record highs approaching $42 a barrel.
Another ingredient: U.S. motorists so far are showing little interest in driving less, despite sticker stock at the pump, analysts said. That’s keeping demand for fuel high and helping lift average gasoline prices in Southern California to record levels.
Answers to where oil prices are headed aren’t so easy to come by.
At least one analyst is hopeful that relief will arrive just after the Memorial Day weekend, the unofficial start of the busy summer driving season.
“The run-up [in prices] is in the process of being just about over,” said John Kilduff, senior vice president of Fimat USA Inc., a commodities brokerage firm in New York. He said the price might climb a bit further in the days ahead, then retreat as refiners build up inventories of oil.
Another ray of hope for beleaguered oil consumers: Saudi Arabia, the leading player in the Organization of the Petroleum Exporting Countries and the world’s biggest crude exporter, is expected to boost production in the coming weeks to help brake the jump in prices.
But it is uncertain whether other members of the 11-nation cartel will go along when they meet this week. On Sunday key OPEC producer Iran gave guarded support to the Saudi position, but cautioned that oversupply could deflate oil prices come autumn.
But some analysts don’t expect a meaningful drop in prices at least through the summer. They also warn that any disruption of California’s already tight gasoline supplies -- such as a refinery shutdown -- would immediately send fuel prices to new records.
“We are in a situation, particularly in California, where if something goes wrong in the next three months, the sky is literally the limit,” said Philip Verleger Jr., an energy expert at the Institute for International Economics in Washington.
Oil prices jumped 3.6% last week alone, and have surged 27% this year. Crude oil for June delivery on the New York Mercantile Exchange rose 30 cents Friday to close at $41.38 a barrel after trading as high as $41.56 during the day.
That eclipsed the previous intra-day record of $41.15 a barrel set in October 1990, when Iraqi troops were occupying Kuwait, and was the highest price in the 21-year history of the Nymex’s oil futures contract. Oil also approached the $40-a-barrel level in the early 1980s amid turmoil in Iran.
After adjusting for inflation, however, oil prices are lower than they were two decades ago. A barrel that cost $40 in 1981 would cost about double that amount in today’s dollars.
That’s of little consolation to consumers, industries and governments worldwide that are feeling the pinch of current energy prices. The oil rally is causing havoc for airlines, trucking and other transportation industries, threatens to hike the political risks for President Bush in an election year and complicates Federal Reserve efforts to keep the economy growing.
Oil’s surge also is reducing Americans’ purchasing power, by forcing them to spend more at the pump.
The average price for regular gasoline last week hit a record $2.266 a gallon in the Los Angeles-Long Beach area, up 8.2 cents a gallon from the previous week and 37 cents higher than a year earlier, the Automobile Club of Southern California said Friday.
Yet there hasn’t been a noticeable drop in motorists’ thirst for gasoline, one analyst said.
“Apparently $40 crude isn’t such a big deal after all, because no one seems to care in terms of consumption,” said Katherine Spector, an analyst with J.P. Morgan Chase & Co. in New York.
That heavy demand is one reason oil prices have jumped. Other factors:
* Demand for crude also is surging in China, India and other countries as their economies pick up steam. Stockpiles of oil, meantime, have been lean and unable to keep up with demand.
* OPEC has tried to keep production in check to maintain relatively lofty prices and compensate for the weak U.S. dollar. Worldwide oil sales are denominated in dollars. Oil refiners have been unable to build their inventories fast enough to prevent the sharp rise in prices.
* Violence in the Middle East -- notably recent terrorist attacks in Saudi Arabia -- is prompting fears that the region’s oil production could be interrupted. That has prompted oil traders to bid prices higher.
* Concerns about a disruption of Iraqi oil supplies hover in advance of June 30, when the United States plans to hand over control of the country to an Iraqi government.
OPEC, which pumps about a third of the world’s oil, is holding an informal meeting this week in Amsterdam, and it’s expected that Saudi Arabia “will send a signal that more supply is coming,” said Kilduff of Fimat. And if there is no more violence in that country, “the [Saudi] security premium that’s in the price of oil now will be reduced,” he said.
Refiners, now running at 96% of their capacity, also are starting to catch up with demand, and that will help lower prices, Kilduff said. “They’re rushing barrels of gasoline to the market,” he said.
But Verleger disagreed, saying the added Saudi production will not raise global supplies enough to trigger an immediate drop in prices.
And though the gyrations of crude oil prices often determine the prices of gasoline and other refined products, this time it’s the strong demand for gasoline that’s helping keep crude oil prices high, he said.
As gasoline prices have soared, “refiners will continue to pay more for incremental supplies of good crude oil that makes a lot of gasoline,” Verleger said. “There’s not enough of that good crude oil around. So gasoline has been pulling up crude oil.”
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Reuters was used in compiling this report.
