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A sharp increase in the price of crude oil, which briefly hit $90 a barrel late Thursday in electronic trading, could start to hit consumers in their pocketbooks in the next few weeks. Among the effects:
- Prices at the pump, which have been flat for two months, are expected to rise shortly, perhaps by as much as 10 cents a gallon. GasPriceWatch.com reported a rise of 7 cents in the past two days, which increased the national average to $2.80 a gallon.
- Airline ticket prices could go up –- just before the peak holiday travel season –- to reflect an increase in the past two weeks of $8 a barrel or 20 cents a gallon on the world oil markets.
- Home heating oil, already at record highs, could keep rising for homeowners in the Northeast.
The economic effect of the latest surge in oil prices, which started to soar again this month, could be substantial. The rise could reduce consumer enthusiasm, particularly for lower-income Americans. Some economists think that if the price of crude oil closes at $90 or higher and stays there for a few weeks, businesses will start passing on their higher costs.
Crude hit $90.02 at about 8 p.m. ET on Thursday, then dropped back down to $89.58. It had closed at $89.47 in regular trading in New York. Crude oil is up 7% this week and nearly 47% this year.
A rise in oil prices will also make the Federal Reserve's job more difficult as it tries to keep the economy going while maintaining price stability.
"If the price holds, it will be a real oil shock," says Don Norman, an economist at Manufacturers Alliance/MAPI in Arlington, Va. "But I'm not sure if it's enough to knock the economy into an outright recession."
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Energy analysts say the latest spike is the result of a confluence of many factors. An initial price burst took place after the Federal Reserve cut interest rates last month by half a percentage point."People began to realize the problems in the subprime-mortgage market were not going to affect oil demand all that much," says Phil Flynn of Alaron Trading in Chicago. "The Fed rate cut put oil on a year-end clearance sale."
At the same time, international energy agencies have been reporting strong oil demand, which is lowering worldwide inventories.
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Can the economy handle $100-a-barrel oil?Few have hit the panic button despite crude oil's recent run toward its all-time high. But consumers could eventually feel real economic pain if energy prices remain high.
It hasn't helped that there is tension in the Middle East with Turkey considering a foray into northern Iraq, where a pipeline transports about 400,000 to 600,000 barrels of oil per day. "That's a lot of oil that could be lost in a tight market," says John Felmy, chief economist for the American Petroleum Institute in Washington.
Norman says it hasn't helped that hedge funds, pension funds and wealthy individuals are speculating in the energy markets.
Also, the falling value of the dollar puts pressure on producers to raise prices to make up for their lost purchasing power, as most oil is priced in dollars.
How much higher can the price of crude go? Flynn says $89 a barrel is certainly possible. If the price moves through this level, he says the next stop is $93 to $94 a barrel. But, he adds, "The price has moved up so fast, it's due for a correction."
Continued: The inflation factor
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