- The Washington Times - Thursday, August 5, 2004

Stocks plummeted as oil prices hit a record $44.41 a barrel yesterday and major retailers such as Wal-Mart reported another month of tepid sales because of high gasoline prices.

The latest twist in the Yukos saga sent oil prices soaring, demonstrating how American consumers and businesses increasingly are being held hostage to oil dramas playing out around the world, from Russia to Venezuela and the Middle East, as supplies tighten.

The Dow Jones Industrial Average, which has reacted in tandem with rises and falls in oil prices for the past week, yesterday plunged 163 points, crashing back through 10,000 and ending at 9,963. Other stock indexes dropped by nearly 2 percent on fears that high oil prices will zap consumers and businesses.

Those fears were confirmed in reports from Wal-Mart, the Gap, Sears, Roebuck & Co. and other major retailers yesterday. Retail sales during July were disappointing for a second straight month as high gas prices cut into consumer buying power.

Wal-Mart’s 3.2 percent sales growth, its second worst in a year, mirrored the sluggish overall gains reported by 65 other retailers surveyed by the International Council of Shopping Centers.

“The longer world oil prices remain at lofty levels, the greater the danger of an imminent U.S. economic slowdown,” said Joseph Quinlan, chief investment strategist with Banc of America Capital Management.

“At current levels, oil prices represent a tax on personal consumption and a growing expense for businesses,” he said. The downturn in consumer spending is particularly dangerous, he said, because U.S. consumers drive growth both at home and abroad.

The discouraging retail sales news blasted stock prices. Many investors had hoped consumer spending would bounce back last month after a poor showing during June.

Federal Reserve Chairman Alan Greenspan and market analysts had predicted only a “transitory” effect on consumer spending from high oil prices, expecting that they would recede from record levels. The upward march in oil prices in the past month has defied those predictions.

Auto companies on Wednesday reported a solid rebound in auto sales in July after a sales collapse during June, mostly because of a resumption of deep dealer incentives.

But gains elsewhere have been restrained by spiraling energy prices, and many analysts say they do not see an end in sight. Economists say oil prices are likely to go even higher, and perhaps test $50, as refiners around the world stock up on supplies for the winter heating season.

“I think you’re going to see $50 a long time before you’ll ever see $30,” said T. Boone Pickens, a former Texas oilman and chief executive of BP Capital LLC, a Dallas investment firm. “In fact I don’t think you’ll ever see $30 again.”

Stoking yesterday’s $1.58 jump in New York premium crude prices was a reversal in the fortunes of OAO Yukos Oil Co. The Russian Justice Ministry rescinded an order on Wednesday permitting the beleaguered oil giant to access its bank accounts to pay for transportation and other operating expenses.

The reversal by the government, which has frozen the accounts in an effort to collect $3.4 billion in back taxes, revives the prospect of disruptions in Yukos’ daily oil shipments of 1.7 million barrels. The company has warned it cannot ship oil by rail to China this month without access to the cash.

The renewed threat of supply disruptions in Russia comes after the Organization of Petroleum Exporting Countries said its members have the capacity to produce only another 1 million to 1.5 million barrels of oil a day.

All of that spare capacity is in Saudi Arabia, whose oil personnel have been under threat of terrorist attacks since spring. Meanwhile, some analysts worry about supply disruptions in Venezuela next week as it holds a referendum on the reign of President Hugo Chavez.

The unrelenting climb in oil prices has surprised many on Wall Street, and has prompted some prominent bulls to retreat.

“Last week, I curbed my enthusiasm for the stock market,” despite better-than-expected earnings this year, because of persistently high oil prices, said Edward Yardeni, chief investment strategist with Prudential Equity Group.

Stocks still could rally modestly in the second half of the year, he said, “assuming that the price of oil won’t jump to $50 a barrel and that the market is learning to live with the prospects and reality of terrorism.”

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