- The Washington Times - Tuesday, May 4, 2004

Oil prices shot to a 14-year high of nearly $39 a barrel in New York yesterday, while the Federal Reserve decided against raising interest rates.

The latest surge in oil prices comes on the heels of a terrorist attack in Saudi Arabia that forced the United States and other Western countries to evacuate oil workers from the world’s largest oil exporter.

With no end in sight for soaring oil and U.S. gasoline prices, which have set successive records in recent weeks, worries are growing about the impact on the U.S. and world economies.

The International Monetary Fund estimates that each sustained $5 per-barrel increase in oil prices cuts growth by 0.3 percent as consumers and businesses are forced to curb spending in other areas to accommodate the higher energy prices.

“Economic growth, if prices continue at these high levels, will weaken, but it takes time,” said Leo Drollas, chief economist at the Centre for Global Energy Studies.

The Fed, aware of the drag from high energy prices, said after a meeting of its rate-setting committee yesterday that it would take only “measured” steps in the future, sparking hopes that it will be slow to raise rates.

The Fed’s statement made no mention of high energy prices, but Fed Chairman Alan Greenspan warned last week of the strain they are putting on the economy.

Rising oil and gas prices, and the uptick in consumer prices they have fueled this year, have thrown new obstacles in the path of the still-recovering economy.

The Fed’s statement noted that inflation is higher and has become a risk for the economy, but risks to growth are of equal concern.

U.S. consumers have grown more agitated as the price of regular gasoline has climbed to new heights each week. Regular gas now costs a record $1.84 a gallon nationwide, but it has breached $2 in many parts of the nation. Higher grades of gasoline are approaching $3 in some areas.

Analysts say prices are likely to move higher in the months ahead as families take to the highways for summer vacations. Just as demand for gas peaks during the summer, so do the stringent requirements for cleaner fuels imposed by state and federal authorities — further raising the cost of fuel.

Oil analysts warn of shortages. Bill Greehey, chief executive of oil refiner Valero Energy Corp., said last week that U.S. refineries are not likely to have sufficient stores on hand to avoid shortages of fuel this summer.

Partly because soaring oil prices have caused refineries to delay purchases of oil for refining, inventories of gasoline are 15 million barrels below normal despite flat-out efforts by refineries this spring to build the necessary stocks, he said.

“The refining system is already being strained, and we’re not even in the peak season yet,” he told investors on a conference call.

The outlook for lower prices this time around is poor, analysts say. That is because many of the reasons for elevated prices are now permanent, posing lasting pressures on supply.

The threat of terrorist strikes in Saudi Arabia, for example, has been building for months. Attacks a year ago targeted residential compounds in the capital, Riyadh, and showed that the oil giant was vulnerable.

The latest attacks have honed in on foreign workers that the kingdom needs to keep producing its shipments of oil each day.

Five European oil workers were killed by gunmen at a facility in the industrial port of Yanbu on Saturday. That prompted the U.S. ambassador to warn American workers on Monday that he could not guarantee their safety and that they should leave the country.

The Saudi attacks, and the escalating violence in Iraq, where insurgents have also attacked oil facilities, raise questions about the security of the world’s oil supply. That has increased the so-called security premium added to the price of oil, analysts say.

“There have been a whole series of what appear to be fights that are going on internally that I think have made people worried about Saudi Arabia, to say nothing of the fact that Iraq is just a complete mess,” said Adam Sieminski, an analyst at Deutsche Bank.

Mr. Greenspan said last week that the threat of supply disruptions has raised the long-term price of oil by as much as $10 a barrel since 1999.

In the short-term, “$40 seems to be a distinct possibility for American crude oil,” said Robert Laughlin, a director at GNI-Man Financial. The price of premium sweet crude hit $38.98 in New York yesterday, while prices in London also soared to levels not seen since the October 1990 buildup to the Persian Gulf war.

Other long-term factors are also driving up oil prices, including exponential growth of consumption in China, where demand has skyrocketed by 30 percent since 2001.

One ray of hope for relief from high oil prices comes, ironically, from the hope that China’s leaders will succeed in slowing the Asian giant’s growth from its rapid pace to prevent the economy from overheating, said Richard Berner, chief economist at Morgan Stanley.

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