Oil Prices and Energy Worries on Rebound
The oil gusher, it appears, is alive and well.
After falling 9% over a two-week span, oil prices have made an abrupt U-turn, renewing fears that surging energy costs could throttle consumer spending and pinch economic growth.
Oil futures bounced up $1.31 to $72.45 a barrel in New York trading Monday as Iran vowed to push ahead with its nuclear program in the face of possible United Nations sanctions. After a similar bump Friday, crude has risen 3.4% from its recent low.
That reversal damped hopes that prices might be entering an extended downturn. It also took some of the cheer out of Monday’s drop in gasoline prices, which fell below $3 a gallon nationwide for the first time since July 17.
The rally in oil prices “is far from over,” said Phil Flynn, senior market analyst with Alaron Trading Corp. in Chicago. “We’re not going to see pump prices fall all that dramatically because the price of crude is going to remain strong.”
Some economists worry that stubbornly high gasoline prices coupled with sharply higher electricity bills caused by the summer heat wave are starting to wear on U.S. consumers, threatening economic growth.
So far, the evidence is mixed. Retail sales grew more than expected in July, but consumer sentiment dropped more than expected in early August, registering its lowest reading since just after Hurricane Katrina.
Recent reports from retailers indicate that the pain consumers are feeling at the pump is starting to affect the rest of the economy.
On Monday, Lowe’s Cos., the nation’s No. 2 home improvement chain, posted second-quarter profit that came in below Wall Street estimates and pared its profit forecast for the year. Lowe’s said high energy prices were partly to blame, although it noted that the cooling U.S. housing market was also a factor.
Industry leader Home Depot Inc. also warned of slowing growth last week. And several mid-priced restaurant chains have reported sales declines as gasoline prices have caused diners to tighten their belts.
“Higher energy prices haven’t pushed the economy under water, but they’re resulting in slower growth than there otherwise would have been,” said Mark Zandi, chief economist for Moody’s Economy.com. “If prices move higher from here, it would be hard to digest and the economy would be in trouble.”
Zandi said the average U.S. household now spent 7% of its budget on energy, twice as much as in early 2002. Among the bottom fifth of households in terms of income, the figure is 12%, up from 7% in 2002.
That increase is shifting the bottom 20% of earners further down the retail ladder, Zandi said, spelling trouble for mid-priced stores and restaurants.
Although consumer price inflation has been relatively tame, Zandi said that could end if oil reached $80 a barrel. And a jump in inflation could persuade the Federal Reserve to resume raising interest rates, he said.
Some analysts have speculated that oil could reach $100 a barrel if the Iran situation spins out of control. Iran’s decision to turn U.N. inspectors away from an underground nuclear facility and its expected rejection today of Western incentives aimed at curbing its atomic ambitions could set up a confrontation with the world’s fourth-largest oil exporter, they say. Economic sanctions could prompt Iran to cut off oil exports -- or even blockade the Straits of Horemuz, the Persian Gulf outlet for much of the Middle East’s oil.
The showdown with Iran has dashed hopes that the fragile cease-fire between Hezbollah and Israel, coupled with the lessening of BP’s problems with its Alaska oil field and the absence so far of a major Gulf of Mexico hurricane, might bring stability to energy markets.
“As soon as we have one problem semi-under control, another problem arises,” Flynn of Alaron Trading said.
The Energy Department said the U.S. average price for a gallon of regular gas was $2.924 on Monday, down from $3 a week earlier. In California, the average was $3.162, down from $3.211.