Oil prices likely to keep wallets light for a while

March 14, 2004|By JAY HANCOCK

ON MAY 28, 2003, President Bush signed a tax-cut bill projected to save Americans roughly $35 billion a year over a decade, an economic jolt that propelled consumers back to the stores last year.

Unfortunately, the oil business is taking away what Congress and the president gave. Since May, the price of oil has risen from $30 a barrel to $36, which translates to about an extra $40 billion a year that gets vacuumed out of our pockets and deposited into the accounts of ExxonMobil, the Kingdom of Norway and so forth.

By itself, the oil price increase is not a big deal in an $11 trillion U.S. economy. But it's not by itself. Combined with other cannonballs, oil prices have the potential to prolong economic problems or, if they keep rising, nudge us toward recession.

Oil prices are bumping up against the $38-a-barrel highs of last year before the invasion of Iraq. They threaten to breach the $40 mark hit in 1990 after Iraq invaded Kuwait.

Gasoline prices are more than $2 a gallon in some parts of the country. That's a $50 fill-up for many sport utility vehicles and minivans.

High oil prices were one big explanation for the record monthly trade deficit reported last week.

High oil prices have threatened the recovery of the airline industry and the survival of US Airways. And they're cutting into household incomes that aren't rising nearly as fast, if they're rising at all.

Several factors have combined to force up the cost of oil, and most aren't going away anytime soon.

Energy demand always drops when the winter heating season ends, which is why many analysts expect oil prices to dip back into the $20s this summer.

But that's not assured, and even if prices fall in midyear, oil economists believe they will test recent highs next winter and perhaps surpass them.

One reason oil costs may not relax this summer: Venezuela, the United States' No. 4 offshore oil vendor, which experienced a crippling oil strike in 2002, is undergoing new unrest and protests against its erratic president, Hugo Chavez.

Venezuela is still recovering from the strike. It can't meet its production targets set by the Organization of Petroleum Exporting Countries. A coup, another strike or other strife in Venezuela could send crude prices off the meter.

Neither has Iraq contributed to oil supplies as much as some had hoped. After the invading coalition toppled Saddam Hussein, some analysts expected a substantial increase in the flow of Iraqi crude and a sustained drop in world prices. But while Iraq has increased production since the Allies took control, it is having trouble getting crude to market because of rundown transportation facilities, analysts say.

Environmental regulations have also driven up the cost of gas. California, New York and Connecticut banned the gas additive MTBE on Jan. 1, noting groundwater contamination worries, which effectively cut refining capacity for those areas.

"It becomes increasingly difficult to substitute one kind of gasoline for another," said economist Thorsten Fischer, who follows energy for Economy.com in West Chester, Pa. "California gasoline is made only in the state, and if there are problems with refineries, then regional shortages are very likely."

U.S. inventories of pumped crude are tight because downstream users don't like to stockpile the product when prices are high, as they have been. That makes the system more vulnerable to kinks, bottlenecks and even higher price spikes. At the same time, the Bush administration is building up the Strategic Petroleum Reserve, which cuts supply and increases demand simultaneously.

Then there is China, which is increasing demand like nothing else in the world. China's oil consumption has doubled since 1990, equals a fourth of what the United States burns and is growing by roughly 10 percent annually.

It's true that the usual, self-correcting magic of the market is addressing some of these problems. High prices have prompted the drilling of new wells and new supply. OPEC members could belie their brave talk of restraint by cheating on quotas even more than usual.

But China and other rapidly developing nations could place a high floor on petroleum prices for years.

Economists like to point out that, adjusted for inflation, the price of gasoline is still lower than in the 1950s. But in the 1950s, the United States didn't have a half-trillion-dollar trade deficit, $7 trillion in national debt and $2 trillion in consumer debt with miserable household-income growth.

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