Oil rises to nearly $61 a barrel, focusing attention on China

Economists expect prices to result in inflation

June 28, 2005|By Robert Manor | Robert Manor,CHICAGO TRIBUNE

The price of oil climbed to nearly $61 a barrel yesterday, setting yet another recent high amid fears that producing countries cannot pump enough crude to meet demand.

The rising cost of petroleum, up more than 60 percent in the past year, has focused new attention on China and its bid to secure long-term supplies. Using government money, a Chinese firm is trying to buy California-based Unocal Corp.

Oil for August delivery rose 70 cents a barrel, to $60.54, on the New York Mercantile Exchange, after trading as high as $60.95. It's the fifth time in the past seven trading sessions that the price of petroleum has hit a record settlement price in non-inflation-adjusted dollars.

Some economists believe the jump in oil prices will translate into higher inflation. Petroleum's biggest role in the economy is as fuel for transportation, though it is also a raw material for an almost endless number of products.

"If you talk to someone who drives an SUV on a long commute each day, it's going to hit their pocketbook," said William Larkin, head of fixed-income investments at Salem, Mass.-based Cabot Money Management. "That is inflation."

Oil costs are a much smaller portion of the economy than they were in the early 1980s, when there was also a substantial rise in prices. That will moderate, but not eliminate, the impact of higher crude costs.

Prices are rising not because there is a shortage of oil but because demand has risen faster than new production. Much of that demand is coming from China, the world's second-largest oil importer, where petroleum is needed to fuel a rapidly growing industrial sector.

That has prompted the Chinese government to look for long-term sources of petroleum. For example, Chinese investors have pitched the idea of building a West Coast pipeline to the Canadian province of Alberta to tap that region's huge supply of tar sands. Although it is expensive to extract oil from tar sands, it is financially viable at current prices.

And last week, China's CNOOC Ltd. offered to pay $18.5 billion for Unocal, which had already received a $16.6 billion bid from Chevron Corp. Unocal has large petroleum reserves in south Asia and is a major retailer of gasoline in the United States.

"The recent offer for Unocal has implications not just for oil but probably for a whole range of necessary natural resources," said Joe Noonan, chief investment officer at Boston-based Appleton Partners. "The Chinese have been very global thinkers."

Yesterday, CNOOC said it welcomed a U.S. national security review of its proposed purchase of Unocal. CNOOC is majority owned by the Chinese government.

"I want you to know we encourage that review and welcome the opportunity to participate," CNOOC Chief Executive Officer Fu Chengyu said in a letter to members of Congress.

Gasoline prices rise with oil prices, of course, and that has already shown up at the retail level. A gallon of regular gasoline cost an average of $2.19 in the Baltimore metropolitan area this week, according to AAA Mid-Atlantic. A year ago, it was $1.95.

There could be some moderation in oil prices if the Organization of Petroleum Exporting Countries can expand production as promised.

Saudi Arabia has indicated it will increase output to 11 million barrels a day, reportedly its maximum, from 9.5 million now. But some analysts question whether the country actually has that much reserve capacity.

The Chicago Tribune is a Tribune Publishing newspaper.

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