- The Washington Times - Wednesday, August 24, 2005

Oil prices soared to a record of $67.32 yesterday as Tropical Storm Katrina, hovering near Florida, threatened to become a hurricane and shut down production in the Gulf of Mexico.

With more hurricanes likely in the weeks ahead, analysts say consumers may see further increases in gasoline prices that already are at record levels near $3 a gallon in major cities.

Gas prices have surged at an unprecedented rate of more than 50 percent since last year, when they first breached $2 a gallon. Oil prices have tripled since 2001.

Yet consumers have largely gone undaunted, and even went on a sport utility vehicle buying binge this summer, leaving economists wondering where the threshold of pain is for the U.S. economy.

Rajeev Dhawan, director of the Georgia State University economic forecasting center, said that while consumers have continued to belly up to the gas pump and pay whatever it takes to fill up, the price spike is cutting deeply into spending on clothing, shoes, recreation, restaurant food and other discretionary items.

Some consumers are even starting to cut back on driving for the first time in an effort to conserve fuel and money, he said.

“Trust me, a sustained $3 a gallon will even make lead-foots like me drive conservatively,” he said. “This force is very strong, but it takes a while to register.”

The near-record sales of gas-guzzling SUVs in July were induced by deep price discounts by auto manufacturers averaging $4,000 a sale, and produced only a temporary deviation from the trend toward greater conservation, he said.

“GM’s employee discount applying to every customer was a masterpiece of marketing,” and effectively paid for each buyer’s gas costs for the next two years, in a “transfer of wealth” from the car company’s shareholders to consumers, he said.

While hurricanes and tensions in the Middle East may cause oil prices to spike occasionally, he said, the underlying reason for crude’s escalation is the strong growth in fuel use in the United States and China at a time when production is declining in the United States and elsewhere, making the world more dependent on volatile Persian Gulf supplies.

Speculation by hundreds of hedge funds in the oil futures market also is driving up premium crude prices, which jumped $1.61 on the hurricane threat in New York trading yesterday. But Mr. Dhawan said he believes prices are “due in” for a reversal soon.

Richard Berner, chief economist at Morgan Stanley, said he also expects oil and gas prices to ease, as they traditionally do with the winding down of the driving season after a hot summer that caused an unusual number of untimely shutdowns at refineries.

But he said consumers and investors also must realize that the situation could easily worsen, given the tightness of oil supplies worldwide and worries about violence and political tensions disrupting production in Iraq, Iran and Saudi Arabia.

“The bad news,” he said, “is that the National Oceanic and Atmospheric Administration is forecasting an active hurricane season that could disrupt supplies and a third seasonably cold winter could underpin demand,” he said.

While booming home prices and low mortgage rates have provided a financial cushion for many consumers against soaring energy prices, they still “represent a major threat to the U.S. and global economy,” he said.

Lawrence Kudlow of Kudlow & Co. said he is not worried, given the “negligible” effect on the economy from high energy prices so far.

The cost of gas is still below the inflation-adjusted record of $3.11 that was set in the early 1980s.

High prices have even produced some welcome developments, Mr. Kudlow said, such as a “tectonic shift” in public thinking about energy conservation and previously forbidden energy sources such as nuclear power.

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