Oil hits record $45.50 as doubts deepen

Spiraling prices imperil U.S. economic recovery

August 13, 2004|By Robert Manor | Robert Manor,CHICAGO TRIBUNE

Oil prices hit a record high yesterday as Middle East violence and a political showdown in Russia cast more doubt over supply, raising concerns that energy costs might continue to rock the wobbly U.S. economy.

Oil rose 70 cents, to $45.50 a barrel, on the New York Mercantile Exchange. It was the highest closing price since oil futures contracts began trading in 1983.

Before the close, the price reached $45.75. Oil prices have set intraday trading records every day except one since July 30.

High oil prices act like a tax on the economy, diverting consumer spending from other purchases. In addition, many businesses must put off capital spending to deal with higher energy costs.

When it raised interest rates this week, the Federal Reserve blamed the recent "soft patch" in the economy chiefly on a "substantial rise in energy prices." The Fed implied that it did not expect prices would continue to increase in the immediate future.

But yesterday's increase, along with continued instability in key energy-producing countries around the world, raise questions about where the price of oil is headed.

"It makes people close their pocketbooks," said Barry Savitz, a trader at Greenwich Prime Trading Group LLC. "It's a big fear factor that can go on longer than we think."

That unwillingness to buy was reflected in the stock market, where the Dow Jones industrial average sagged 123 points to its lowest close of the year.

Analysts said several factors are converging to drive the price of oil higher, with no ceiling in sight.

"It's the flare-up of violence in Iraq ... the political situation in Venezuela, the social situation in Nigeria," said Lysle Brinker, senior vice president at John S. Herold Inc. in Norwalk, Conn. "We have such dependence on Third World, unstable countries."

Analysts said attacks on Iraqi pipelines have reduced the country's output of 2 million barrels a day to an unreliable trickle. Venezuela, a major exporter to the United States, is in a chronic political crisis that threatens to curb production. Another exporter, Nigeria, has seen a wave of attacks on oil facilities and kidnappings of foreign oil workers.

But continuing events in Russia might cast the biggest shadow over prices, analysts say, and could be the engine to drive them higher.

President Vladimir V. Putin imprisoned oil billionaire Mikhail Khodorkovsky late last year and is threatening to seize his company, OAO Yukos, in what is widely thought to be a crackdown on Putin's political opposition.

Yukos is one of the world's major oil companies, and even the idea that its production might be interrupted has driven up prices for weeks, analysts say.

Yukos pumps 1.7 million barrels of oil a day. That is somewhat more than the global excess capacity to produce petroleum. If Yukos' output is missing for any significant time, shortages will emerge.

Khodorkovsky's court appearances, in which he is confined in a small steel cage, aren't likely to encourage Western entrepreneurs to invest in Russia. That could force up prices for years to come, analysts say.

With production of 8.5 million barrels of oil a day, Russia is second to Saudi Arabia and its 9.8 million barrels. If Russia could increase petroleum exports, it would hold down prices.

U.S. policy is to diversify its sources of petroleum to ensure a reliable supply, and Russia has the reserves to equal or perhaps exceed Saudi output.

But with the government freezing Yukos' assets to satisfy alleged back taxes, foreign investors are less likely to risk their money in Russia. The country needs capital to update pipelines and refineries.

The Chicago Tribune is a Tribune Publishing newspaper. Wire services contributed to this article.

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