US economy now faces $50-a-barrel oil

It is news the world doesn't need: the price of oil finally going over $50 a barrel - a level that, even adjusting for inflation, has not been seen in almost 15 years. And most energy experts don't think this is a spike - prices could still move higher - and stay relatively high for the next year.

If prices do stay high, they will act as a brake on the economy, by some economists' estimates, lowering growth in the year ahead by as much as a full percentage point. The timing is awkward: In another month merchants hope consumers will be thinking about holiday gifts, not their fuel bills.

Although oil prices have been high for some time, the latest push over the psychological $50 mark - in London, and hovering around that level in New York - is the result of a combination of events. There is enough geopolitical uncertainty from Iraq to Nigeria to keep the oil markets nervous. The US oil industry is still recovering from the damage done by hurricane Ivan, which not only knocked out some production in the Gulf of Mexico, but also kept tankers from unloading imports in New Orleans and Galveston. This has resulted in a sharp drop in US inventories to their lowest level in 30 years. "We won't see any real relief, any respite, until we see some increase in US crude inventories," says John Kilduff, a trader at FIMAT USA.

How high can prices go? Mr. Kilduff envisions short-term oil prices of $51 to $53 a barrel. And he says $60 per barrel is not out of the question, "if Iraq worsens and some other disruptions take place."

Over the longer term, however, some analysts see prices retreating as the high prices encourage nations to produce oil and demand starts to recede. "EIA's views is still that prices will drop below $40 a barrel by the end of next year," says Erik Kreil, an analyst at the Energy Information Administration (EIA) in Washington.

Yesterday, even the news that Saudi Arabia would increase its production to 11 million barrels of oil per day did not immediately reduce prices. Oil traders say they will have to see the production first to believe the ramp-up is possible. "This is a Saudi misstep, Aramco [the Saudi national oil company] said earlier that the additional production wouldn't be on line until the end of the year," says Kilduff.

Another factor in the oil equation is the spurt in global demand - almost an additional 2.5 million barrels per day. Much of this is moving to China where there is a combination of economic growth and the nation's build-up of its own strategic petroleum reserve. A reflection of this demand is a tight tanker market, which is raising the price of transporting oil.

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