Oil prices likely to stay high, weigh heavily on economy

With supplies stretched to the breaking point and demand strong, even small disruptions could cause further damage.

August 14, 2004|By William Neikirk | William Neikirk,CHICAGO TRIBUNE

WASHINGTON - When Saudi Arabia announced this week that it stood ready to pump 1.3 million more barrels of oil a day to stabilize the price of the world's "black gold," something unusual happened.

The price of oil soared to a record high anyway.

The inability of the world's largest oil producer to sway the petroleum market sent an ominous message to consumers everywhere: Oil prices are likely to remain high for some time, exacting a heavy toll on the economy.

Some analysts say oil could hit $50 a barrel. Others think an even higher price is in the offing if demand and world political developments break the wrong way.

Still others say prices could tail off a bit after the summer driving season comes to a close, though oil would remain costly by historical standards.

It is certain that as the price of oil goes, so goes the U.S. economy.

The Federal Reserve blamed this summer's economic slowdown on higher petroleum prices. By predicting that the economy would improve, the central bank implied that oil prices would ease in the near future.

That forecast appears to be shaky, energy experts say. With demand for oil rising faster than supply and the refining capacity for gasoline stretched virtually to the limit, few have confidence that petroleum prices will decline significantly soon.

The oil market is in the throes of powerful new forces. Global consumption has surged with the rapid growth in industrializing countries such as China and India, and a stronger world economy in general. Analysts say the world's refineries are operating at or near capacity, so even if more oil is drilled, it cannot be quickly processed.

The supply-demand situation is so tight that even a small disruption in critical producing countries such as Venezuela, Iraq and Russia could force prices up further.

The price of oil also has become a campaign issue, with President Bush more vulnerable because of the potential harm to the economy. The president has an energy policy that emphasizes increasing supply.

Democratic candidate John Kerry has stressed increasing energy conservation, investing in alternative fuels and creating tax incentives to help automakers produce more fuel-efficient cars.

The ho-hum reaction to the Saudi announcement is a change from the days when the oil-rich kingdom, as a swing producer, could lower the petroleum price quickly.

Crude oil for September delivery rose $1.08 yesterday, or 2.4 percent, to close at $46.58 a barrel on the New York Mercantile Exchange, the highest since oil began trading in New York in 1983. Prices are up 51 percent in the past year.

Jay Saunders, oil analyst at Deutsche Bank AG, said Saudi Arabia's production announcement had little impact in part because the extra Saudi oil probably would be high in sulfur and not many old refineries could easily convert it into gasoline.

The price of crude oil averaged more than $27 a barrel last year, but it has soared this year. Gasoline prices have topped $2 a gallon in many parts of the country.

The federal Energy Information Administration estimated last week that average oil prices could remain at or above $38 a barrel for many months. That's lower than the current price, but the forecast is higher than many analysts had been projecting, particularly for next year.

"We see a global oil market in which production capacity ... is nearing its limits while demand continues to be strong," the Energy Department agency said.

Heavy U.S. imports

The United States imports more than 62 percent of the oil and related products it consumes, according to the American Petroleum Institute. Higher oil prices harm an economy in two ways. They act like a tax in depressing business, and they also push up the rate of inflation. Americans who spend more on gasoline tend to cut back elsewhere.

On Chicago's South Side, Michael Bulanda, operations manager of McDowell Trucking Inc., a freight-delivery company, said, "Our fuel cost has increased by about $1,000 to $1,500 a month."

He added a fuel surcharge when diesel prices began to rise, and he said customers complained at first.

"But as gas prices continued to rise and go over $2 a gallon, people understand that it is not us doing this," Bulanda said. "Most of the customers are very understanding."

When the summer driving season ends, analysts say, there is a chance that oil inventories could be rebuilt in the fall and winter to stabilize the price at less than $40 a barrel. But few are betting that will happen.

The problem facing Americans is that the old reliable cushions that once helped stabilize oil prices are gone. Oil analysts say the supply-and-demand situation is as dire as it has been since the shortages engineered by the Organization of the Petroleum Exporting Countries in the 1970s.

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