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Oil Cost, Anxiety Are Both Rising

As crude threatens to top $50 a barrel, some fear a new economic reality. Others say a petroleum-induced recession is unlikely.

August 21, 2004|Bill Sing and Elizabeth Douglass | Times Staff Writers

Oil prices briefly topped $49 a barrel Friday, and the specter of $50 crude renewed concerns that an already slowing economic recovery could be hobbled.

That prospect gave energy new prominence in the presidential campaign, with Democrats on Friday stepping up attacks on President Bush's energy policies.

The benchmark U.S. grade of crude oil hit a record $49.40 before falling back to close down 84 cents at $47.86 on the New York Mercantile Exchange. The price ended the day 34% higher than just two months ago, and 54.6% higher than a year ago.

The retreat, attributed to a pause in the fighting in Iraq, came after a weeks-long record-breaking streak. That led stock traders to hope the worst was over and sparked a rally on Wall Street. But some energy analysts said still higher crude prices were inevitable, because of short-term speculators feeding on terrorism fears, global political instability, supply limitations and relentless demand.

Although oil costs less now than in the 1970s and 1980s when adjusted for inflation, the $50-a-barrel barrier is seen as psychologically important, and many economists say crossing it would pose a hazard. Even if $50 is never breached, the global economy has already moved to an expensive new neighborhood.

"We're not going to see $18-$20-$22 oil. Those days are over," said Michael Fitzpatrick, vice president of energy risk management for commodities brokerage Fimat USA Inc. "We were living in a fantasy world here for years, and now we're having to face reality."

Oddly enough, as crude oil prices have soared recently, gasoline has become cheaper. In California, pump prices have fallen for 11 straight weeks. Behind the apparent contradiction is an all-out production push by gasoline refiners and a softening in demand by motorists.

Nationwide, steep petroleum prices have curbed spending by consumers -- particularly those in lower-income households -- who also have been hit by stiff health costs, job insecurities and sluggish wage growth. Fuel-dependent industries such as airlines and trucking have been hammered.

"We're hearing about small trucking companies closing up shop," said Bob Costello, chief economist at the American Trucking Assn. "At these prices, I don't know how any company can exist."

Gasoline prices, when they were higher, may have slashed a half percentage point off the economy's growth in the second quarter, which slowed to an annual rate of 3%, down from 4.5% in the first three months of the year, said Steven A. Wood, chief economist for Insight Economics in Danville, Calif. Expensive oil was partly blamed for the measly 32,000 net jobs created nationwide in July.

Treasury Secretary John W. Snow said Thursday that energy prices were creating a "headwind" for an otherwise strong U.S. economy, acting like a tax on consumers and businesses.

Allen Sinai, chief global economist for Decision Economics in New York, said, "What was once a healthy U.S. and world economy is getting buffeted now by oil."

Some economists have raised the prospect of stagflation, a combination of stagnant growth and high inflation. Stagflation, triggered largely by oil price shocks, was a major drag on the U.S. economy in the 1970s.

And oil price spikes helped trigger the U.S. recessions of 1990-91 and 2001.

But the economy today is viewed as hardier. Interest rates, for example, are near generational lows. For that reason, an oil-incited recession is unlikely, said Anirvan Banerji, research director for the Economic Cycle Research Institute, whose leading economic indicators correctly predicted the last two U.S. recessions.

What's more, gasoline accounts for a lower percentage of household expenditures than a decade ago, thanks in part to increased energy efficiency, and that allows some consumers to better absorb price spikes.

Some don't even care. "I love to drive," said Dex Tompkins, 42, a printer from Ballard, Wash. "Gas would have to go up to $10 a gallon before you'd catch me on the bus."

Fortunately for Tompkins, U.S. gasoline prices have been on the decline, with the average slipping 0.2 cent last week to $1.875 a gallon, according to the U.S. Department of Energy.

The retail reprieve might not last. In September and October, pump prices will "be moving up" even if crude were to fall back to $42, said John Segner, lead portfolio manager for Invesco's energy mutual fund. And if oil prices stay near $50 a barrel, he said, gasoline prices could surpass the U.S. record average for self-serve regular of $2.064 a gallon set May 24.

Mark Baxter, director of Southern Methodist University's Maguire Energy Institute, was more pessimistic. "We're just easily one major disruption away from $60 oil," he said, "or possibly $3-a-gallon gasoline."

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