Oil is again black gold, but so far, little sign of inflation

At nearly $30 a barrel, oil prices are rippling through economy,

The highest oil prices since the Gulf War are rippling through the economy - hitting Americans everywhere from the gasoline pump to the airline ticket counter to their home thermostats.

More broadly, concern is rising that if the high prices persist, they could reignite inflation and further drive up interest rates. One caveat: The new economy is so dependent on high technology that oil doesn't affect it as much as it did back in the days of the Arab oil embargo.

Thus inflation, at least for now, remains the saucy in-law who hasn't shown up for dinner yet.

"Oil is still probably the single most important price that affects the well-being of Americans," says William Cheney, chief economist for John Hancock Financial Services. "When the price goes up ... America is in a sense a little poorer. But we are much better at adapting to it now."

Adapting, perhaps, yes. But not always easily. Consider that just in the past week:

*The national retail price for unleaded gasoline hit the highest level since the Energy Department began keeping records in the early 1990s. At $1.31 a gallon, it is up 38 cents from over a year ago.

*Home heating oil prices have nearly doubled in parts of the Northeast. In Connecticut this week, retail prices shot up 40 cents, to $1.70 a gallon. In Massachusetts, they hit $1.74 - 57 cents over a week ago.

*The nation's top airlines have added a $20 "fuel fee" surcharge to round-trip tickets. Houston-based Continental Airlines says its jet fuel costs in the fourth quarter were 50 percent higher than a year ago.

Heating oil costs have become severe enough that President Clinton on Tuesday released $44 million in emergency heating fuel funds. The aid will be targeted at hard-hit residents in Alaska and the Northeast.

Behind the high oil prices - now near $30 a barrel - is a familiar villain to American consumers, the Organization of Petroleum Exporting Countries (OPEC). Under an agreement reached in March 1998, OPEC members have cut their oil production to reduce a worldwide glut, in hopes of bringing up prices from a 50-year low of $10 a barrel. It's worked.

"If OPEC sticks to the agreement, the peak we're seeing now will be around for quite a while," says Sarah Emerson, an oil expert with Energy Security Analysis Inc. in Boston. "The willingness to stick to the agreement has been remarkably high."

Like many analysts, Ms. Emerson predicts that crude oil prices, now at $28 a barrel for West Texas Intermediate, will dip in the springtime, when the winter heating season ends, and then return to $24 or $25 a barrel when the summer driving season begins.

But the longer prices remain high (industry figures consider $18 a barrel to be an "equilibrium," or stable price), the more OPEC members will have an incentive to cheat on their quotas, and pump more oil to sell at the high prices. Such cheating, if widespread, would bring the price of oil back down. Energy Secretary Bill Richardson says he will meet with ministers from leading oil-producing nations in the next few weeks to try to convince them to expand production.

At the same time, however, the administration is under pressure from members of Congress to release oil from the nation's Strategic Petroleum Reserve (SPR), particularly after the nation's recent cold snap. While such a move could reduce, at least temporarily, the price of fuel for American drivers, homeowners, and businesses, it would also hurt struggling American oil producers, who are just getting on their feet after two years of low oil prices.

"The SPR's role is just to make up for supply shortages, and we haven't seen that yet," says George Beranek, industry analyst for the Petroleum Finance Company in Washington. Indeed, while American oil stocks in January were at their lowest level in decades, there is still plenty of oil on the global market, he says.

Mr. Richardson, for his part, reiterated his position this week that the reserve be used only if there is a disruption in oil supplies, not to control prices.

Oddly enough, using SPR reserves to bring down oil prices could be counterproductive for US foreign policy, some analysts say. Such a move would remove the incentive by OPEC members to cheat on their quotas and produce more oil. "If the administration opens the spigot completely to meet demand, you would lower prices and strengthen OPEC, and lengthen its agreement," says Tim Hopper, an economist at a Federal Reserve Bank branch office in Houston.

Still, as much as oil prices have gone up, they aren't hitting everyone as hard as some surges in the past. The reason: Incomes have risen in the boom economy."The US consumer hasn't felt the pinch just yet," says Mr. Hopper. "As stock prices go up, consumers feel wealthier and when you feel wealthier, you'll spend more."

*Associated Press material was used for this report.

(c) Copyright 2000. The Christian Science Publishing Society

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