Oil Prices Highest Since Gulf War
By DAVE CARPENTER
AP Business Writer
CHICAGO (AP) -- The yearlong price surge that pushed crude oil to its highest level since
the Gulf War in 1991 has so far been but a small bump in the path of the steamroller U.S.
economy.
But that's likely to change soon, hitting consumers with an even steeper rise in gasoline prices
-- already up 25 percent this year -- as well as fuel surcharges on plane tickets and higher
costs on products ranging from plastic goods to anything that's shipped.
Oil rose as high as $26.80 a barrel Thursday on the New York Mercantile Exchange, the costliest since January 1991, when
war in the Persian Gulf drove it to $32. Profit-taking ultimately pushed it back to $25.80 for the day. But analysts are talking
about the possibility of $30-a-barrel prices by year's end.
''Those SUVs are going to be pretty expensive to run,'' said John Kilduff, senior vice president of energy risk management for
Fimat USA, a New York futures brokerage firm.
''At around $30 a barrel, you're probably looking at a nationwide average of at least $1.50 a gallon for gas, higher in places
like New York and high-tax states, and probably over $2 a gallon in California,'' he said. ''Just in time for Christmas. That's
going to be shocking for people.''
Currently the nationwide average price of a gallon of regular grade gas is $1.25.
If oil's rise doesn't end soon, experts say, the nation's overall inflation rate will begin to accelerate. That could, perhaps, cause
the Federal Reserve board to impose another interest rate increase, its fourth in recent months. A rate hike, while it would curb
inflation, could also slow down U.S. economic growth, jeopardizing corporate profits, jobs and the stock market.
This could, in turn, reverberate around the world, where some regions such as Asia are still recovering from recessions.
Still, the unease is far from panic. No one is forecasting oil will even approach the all-time high of $40.42 a barrel of Oct. 11,
1990, just after Iraq's invasion of Kuwait. And economists note that, in current dollars, prices aren't really the equivalent of
prices from the Gulf War of nine years ago or the oil crunch and recession of two decades ago.
''There's no cause for alarm,'' said Leo Drollas, chief economist for the Center for Global Energy Studies, a London think tank.
''But there's cause for concern.
''We've been blessed by low inflation, which has helped the Asian recovery and kept the U.S. economy booming. And inflation
is edging up, for other reasons as well. This is just giving it a kick when it's not needed,'' he said.
Oil's phenomenal price runup took off last March when the Organization of Petroleum Exporting Countries and key allies,
disconcerted by plummeting prices and a world glut, cut production by 2.1 million barrels a day -- 2.6 percent of world totals.
Except for a dip from $25 to under $21 this fall, it has continued unabated as OPEC members have largely adhered to the
lower production levels. Now they are widely considered likely to extend them past their scheduled expiration in March.
With crude oil inventories near a two-year low, OPEC is still largely complying with the cutbacks, and with the arrival of colder
weather that increases demand, analysts say there's no end in sight to oil's rise.
Americans have grumbled about higher gas prices, but high demand signals they have largely shrugged them off. But Kilduff
says the latest spike will be more noticeable in the coming weeks as gas retailers, airlines and shippers pass along their higher
costs to consumers.
''We'll probably have a good six months or so of inflated energy prices that we'll have to deal with,'' he said.
Ironically, experts say, while OPEC's strategy is paying off in the short run, it will hurt demand for the cartel's oil over the long
run because soaring prices have drawn other producers into the market to fill the gap.
Western officials, worried that the decline in oil stocks leave them more vulnerable to market swings, hope OPEC nations grow
uncomfortable with the surprising surge in prices and end the cutbacks sooner rather than later for the sake of market stability.
''The higher the oil price goes, the greater the danger the whole thing (market) could unravel,'' said Mehdi Varzi, an oil industry
analyst in London for the investment bank Dresdner Kleinwort Benson.
Adds Roger Diwan, director of global oil markets for the Petroleum Finance Co. in Washington: ''If prices go higher than what
we have right now, we're getting closer to the point where they're getting out of hand and something needs to be done to stop
them.''
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