- The Washington Times - Thursday, July 13, 2006

Escalating tensions in the Middle East sent the price of crude oil smashing through another record yesterday to $76.70 a barrel in New York and set off a plunge in financial markets, with the Dow Jones Industrial Average falling 167 points.

With gasoline prices hovering near last fall’s highs of more than $3 a gallon, analysts say, consumers are likely to see new records at the pump in the weeks ahead, reflecting surging oil prices and hurricane threats.

“Energy prices are going higher the rest of the summer,” said Mike Sander, a commodity broker at Altavest Worldwide Trading Inc.

Worries that high oil prices and political tensions will add further weight to the slowing U.S. economy and cut into corporate profits triggered a sell-off in the stock market and sent investors scurrying into safe-haven investments such as gold and bonds.

The Dow fell back below 11,000 to land at 10,846, completing a two-day loss totaling 288 points, while the Standard & Poor’s 500 Index erased its gains for the year.

“The political unrest is causing an uneasiness in the world,” Mr. Sander said. “People are protecting their wealth.”

The breakout of tensions on several fronts in the Middle East ignited the market turmoil. Hezbollah fired two rockets from Lebanon into Israel’s third-biggest city, Haifa, after Israeli forces bombed Beirut’s airport and other targets.

Meanwhile, violence is heating up in Iraq and Afghanistan despite the installation of democratic governments, and the U.S. and European allies are moving to take their nuclear confrontation with Iran before the U.N. Security Council. Rebel attacks in Nigeria yesterday also raised fears of further disruptions in exports from Africa’s largest oil producer.

“Geopolitical fears have sent stewing tensions to a boiling point,” said John E. Silvia, chief economist with Wachovia Securities. Although the rise in oil prices this year has been relentless, U.S. consumers have been equally persistent at keeping up their driving and gas purchases no matter what the cost, he said.

Although consumers have pulled back some on spending at stores and restaurants, they are not driving less or switching en masse to more fuel-efficient cars. Consumers continue to favor sport utility vehicles over cars that get better mileage, Mr. Silvia said.

Even as average pump prices rose to within a nickel of $3 nationwide, consumers shopping for used cars cut back on Internet searches for more fuel-efficient models, said Cars.com editor David Thomas.

Searches for some of the most popular gas-saving models — Toyota’s Yaris and Prius, the Geo Metro, and Honda’s Insight and Fit — declined significantly last month, he said.

“The initial shock of the recent rise in gas prices has seemingly worn off,” he said.

Opinion polls show that consumers continue to rank fuel costs among their top economic concerns, however, and the price at the pump has become a volatile political issue in an election year. Democrats are trying to make the issue into a referendum on Republican rule in Washington by publicizing the doubling of gasoline prices in each state since President Bush took office.

High energy prices, which include electricity and heating fuel, are eating into consumer purchasing power to the point they more than offset a nearly 4 percent rise in wages in the past year, said Carl Steidtmann, chief economist of Deloitte Research. He predicts a “difficult retail environment” in the fall as consumers struggle to keep up.

“The triple threat of high energy prices, a soft housing market and relatively weak job growth” will work its way through the economy, he said.

With higher energy prices cutting into purchasing power, consumer spending all but ground to a halt last month, suggesting that economic growth in the second quarter will be at best half the first quarter’s pace of 5.6 percent, Mr. Silvia said.

Fears that American shoppers will lose their bravado and surrender in the face of higher energy prices, interest rates and other obstacles have shaken financial markets around the world.

“Any time you get a new high in oil it’s not a good signal,” said Christopher Orndorff, head of equity strategy at Payden & Rygel. When “you have something that takes money out of consumers’ pockets, that’s a net loss for our economy.”

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