- The Washington Times - Wednesday, March 17, 2004

Oil prices soared to a 13-year high of $38.18 a barrel yesterday, bringing into sharp focus a renewed threat to the economic recovery from high energy prices.

The price for premium crude oil jumped in New York trading to levels not seen since the October 1990 buildup to the Gulf war, for reasons ranging from heightened terrorism risks and lagging production in Iraq to low inventories of oil and gasoline and China’s emergence as a major oil consumer.

Some economists say climbing prices for oil and gas, and rising heating and electricity bills, are sure to slow economic growth this year as they eat into consumers’ discretionary incomes and discourage businesses from hiring and spending on other items. Industries that are big users of oil and energy — such as chemicals, aluminum and fertilizers — have already seen thousands of job losses and plant closings.

Consumers are already experiencing “sticker shock” from record-high gasoline prices and double-digit gains in their heating and electricity bills. But American industries are actually the hardest hit because they are the energy users most likely to get squeezed out of the market, analysts say.

Washington-area consumers, after a winter of high heating bills, are scheduled to see a 40 percent increase in their electricity rates with the expiration this spring of fixed-rate contracts offered by Pepco when energy prices were lower, the utility recently announced.

Meanwhile, manufacturers from aluminum plants in the Pacific Northwest to plastics makers in New Jersey are shifting factories and jobs to other countries because domestic prices for natural gas, oil and other energy sources are among the highest in the world.

“Prices rise and jobs go overseas,” said Greg Lebedev, president of the American Chemistry Council, estimating that the lost spending power for consumers and businesses as a result of a recent doubling of natural gas prices will be $1 trillion over the next 20 years.

The steady climb of oil prices in recent weeks reflects a convergence of growing demand from the world’s three largest oil consumers— the United States, China and Japan — even as supplies are set to shrink April 1 because of a cut in production by the Organization of the Petroleum Exporting Countries.

World demand grew by 1.4 million barrels a day last year and is forecast to grow by an additional 1.5 million barrels a day this year, primarily because of record consumption of gasoline in the United States and China, where auto sales and industrial production are expanding rapidly.

Joseph P. Quinlan, chief market strategist with Banc of America Capital Management, said he expects dramatic growth of consumption in China — potentially the world’s biggest car market — to drive oil prices for years to come.

“Auto sales in China soared by roughly 70 percent last year,” he said, contributing to a 46 percent boom in oil imports. The government in Beijing expects double-digit growth in auto sales to continue as incomes grow, China’s middle class expands, and cars made there become cheaper and more numerous.

Despite the strong pickup in demand, OPEC has not backed off its Feb. 10 decision to cut production by 4 percent, or 2.5 million barrels a day. The move comes partly because OPEC fears demand will wane as it usually does during the spring and partly because of the dollar’s 15 percent fall against other currencies in the last two years, which has cut the value of oil sales denominated in dollars.

OPEC ministers have recently been discussing raising their target range for oil prices by $4 a barrel to reflect the reduced purchasing power of the dollar. Crude prices have risen more than $4, or nearly 13 percent, since OPEC announced its cutback.

U.S. prices for light crude have averaged almost $35 a barrel in 2004, well above 2003’s average of $31, which was the highest in more than two decades.

Yesterday’s price jump of nearly 2 percent came after the Energy Information Administration reported a further decline of 800,000 barrels in U.S. gasoline inventories. The country is behind schedule in its effort to build gasoline stocks before the summer driving season, when demand peaks.

Oil prices also rose in the last week amid heightened concerns about terrorism in Spain, Iraq, Pakistan, Saudi Arabia and other hot spots around the world. Sabotage to Iraq’s northern oil pipelines and other problems have prevented that country from producing the more than 2 million barrels a day many analysts had expected by now.

“The combination of very high crude oil prices and heightened geopolitical risks might be drags” on the world economy, which is why stock prices plunged in the last week, said Edward Yardeni, chief investment strategist with Prudential Securities. But he expects the drag from high energy prices to be offset by lower interest rates as markets and central banks around the world react to the prospects for lower growth.

John Park, an economist with Kudlow & Co., expects only a small impact on the world economy from the surge in energy prices.

“We do not believe they pose a serious hurdle,” he said, noting the economy has become less sensitive to oil prices as a result of greater energy efficiency in recent years.

“Consumers certainly feel the effect of higher gasoline prices” and are likely to spend $30 billion, or 15 percent, more at the pump this year, he said. But he noted that amount represents only a small fraction of spending overall.

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