Wave of bad news drives up oil prices
Supply worries helped push oil futures above $80 a barrel Wednesday, before the commodity closed at a record high of $79.91. That could pressure consumers and businesses already stung by sluggish housing prices and a credit crunch.
With gasoline prices rising, motorists and corporations are studying their shrinking wallets with alarm, signaling more turbulence ahead for an economy that so far has weathered high energy costs.
“Gas prices affect everything,” said Ruben Guerra, who owns packaging and commercial construction companies in the City of Commerce. “It’s the extra money you need to take your kids to Magic Mountain or Disneyland, but now you need to spend it on gas.”
Economist Nigel Gault of Global Insight said the oil-price surge was “not a hammer blow” that would necessarily drive the U.S. economy into a tailspin, but “$80-a-barrel oil pushes us closer to a recession. It hurts us at the margins.”
Another expert said it was bad timing for the economy.
“The last thing you want to do is to make it more difficult for American consumers to spend more on goods produced in the United States. This is just going to make it more difficult to dig ourselves out,” said Charles Cicchetti, retired chairman of the government, business and economy program at USC’s School of Policy Planning and Development.
The effect is likely to be broad, said John Silvia, chief economist for Wachovia Corp.
“The impact is pretty wide, not just gas at the pump. It also adds to the costs of production and the price of materials, which hurts corporate profits. There’s a negative impact on corporate cash flow and on equipment and software spending. Dividend income goes down. That’s not a huge difference but another channel on the down cycle for consumers,” Silvia said.
Light, sweet crude for October delivery hit an all-time intraday trading high of $80.18 a barrel on the New York Mercantile Exchange after the Energy Department and the International Energy Agency reported a surprisingly sharp drop in U.S. oil inventories and concerns grew about a strengthening tropical storm in the Gulf of Mexico. The record-setting close of $79.91 a barrel was $1.68 higher than Tuesday’s close, which was also a record.
A barrel of oil is still cheaper than the 1980 inflation-adjusted high. A $38 barrel of oil in 1980 would be worth about $100 now.
Analysts had expected oil prices to decline, but now they are predicting that crude will sell for $78 to $83 a barrel for much of the rest of the year.
They blamed the latest increase on a broad assortment of influences, including news that the Houston Ship Channel was shut at midday because of rough seas. The channel is a strategic waterway that allows ships to deliver crude to Gulf Coast refineries.
Antoine Halff, head of energy research at Fimat USA Inc., said the market noted the Paris-based IEA’s recognition that it doesn’t take a direct hit from a storm to affect oil production.
“The net result” of precautionary shutdowns and evacuations in Texas and Mexico because of Hurricane Dean “is that supply dropped by 430,000 barrels a day in August, on average, in Mexico and the U.S.,” Halff said.
Oil inventories fell by 7.1 million barrels and gas supplies fell by 700,000 barrels in the week ended Sept. 7, the Energy Department said.
Continuing concern over Monday’s attack by leftist rebels on oil and gas pipelines in Mexico was another driver, as was word that production at oil giant BP’s Prudhoe Bay field dropped to 186,000 barrels a day on Monday, down from 300,000 early in September.
The price increase came despite a decision Tuesday by the Organization of the Petroleum Exporting Countries to increase production by 500,000 barrels a day on Nov. 1. The extra output is too little, too late, analysts said.
“They really needed to open the taps to get prices down,” said Mike Fitzpatrick, vice president for energy for MF Global in New York.
Then there’s the question of whether OPEC could still increase production fast enough to satisfy growing global demand.
“The only spare capacity is in Saudi Arabia. It is no longer a matter of OPEC just being able to turn on the taps. The oil is there, but they can’t get to it that quickly,” said Global Insight’s Gault.
That pointed to less relief than normal at a time of year when gasoline prices are usually heading down. On Wednesday, self-serve regular cost $2.815 a gallon on average nationwide, up 4.5 cents in the last month, according to AAA’s daily price survey.
Guerra, who employs 23 people at his construction company and three at the packaging operation, gives his workers money to spend on the gas they use driving from customer to customer.
“I’ve more than doubled what I spend on gas . . . to $60 every other day,” Guerra said. “So it really hits my bottom line when gas goes up. Then I have to raise my prices.”
Jack Ochoa, who owns a Pasadena-based emergency-preparedness company called Safety Express, said small firms with fixed-price government contracts don’t have the luxury of raising their prices.
“That’s not a business strategy,” Ochoa said. “That’s a going-out-of-business strategy.”
Patricia Perez, who co-owns a South Pasadena public relations company, said professional service businesses were feeling the pinch.
“Even the woman who waters the plants at our office added a fuel charge,” said Perez of Valencia, Perez & Echeveste. “It wasn’t much, maybe $10, but it’s another hit.”
But at least one economist thought that $80-a-barrel oil wouldn’t harm the economy and consumer spending.
“In the ‘70s, when oil shot up in price, the economy suffered very badly. But in the 1980s and 1990s, we got used to it. Now, it’s harder to detect any impact on the overall economy” from oil price surges, said Edward Leamer, director of the UCLA Anderson Forecast.
“It will cause grumbling among consumers, but as long as they have a credit card in each pocket and another one coming in the mail, it won’t affect their spending,” Leamer said.
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