Oil prices' relentless rise

Hovering near $60 a barrel, they may hit consumer spending and ripple through economy.

By , Staff writer of The Christian Science Monitor

The price of oil is close to topping the psychological pivot point of $60 a barrel.

The latest run-up in prices comes at the beginning of the summer driving season, when Americans are starting to map out their vacations and load the SUV for a trip to the beach. Higher gasoline prices - now back on the rise - mean consumers may cut back on other purchases, from ice cream to iPods.

Moreover, the surge in energy prices is hitting the economy at a critical moment - the Federal Reserve's interest-rate hikes are finally starting to bite. The combination of higher rates and higher oil prices could mean a slower economy in 2006.

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"All these negative headwinds are creating the perfect storm for next year," says Anthony Chan, chief economist at JP Morgan Asset Management in Columbus, Ohio.

"It's inevitable it will slow the economy."

Energy analysts have different theories about what's driving up prices at this point, but don't see any one culprit.

"There are no specific fundamentals to point to, no outages, strikes, or production problems," says Rick Mueller of Energy Security Analysis in Wakefield, Mass. "But, if oil goes over $60 a barrel, it will have a psychological impact. It will get folks' attention."

What's behind the rise in prices

Recently, OPEC said it would increase production to try to slow the price rise. Both oil and gasoline inventories are considered adequate to meet demand.

"Based on current prevailing inventories, oil should be trading in the $20 a barrel range," says Steve Belino, an oil trader at FIMAT USA, a trading firm. Mr. Belino blames "speculators" for the latest price rise. "To be where we are is quite astonishing."

Yet some analysts believe robust demand for diesel is behind the oil-price rise. The price of diesel is now higher than the price of gasoline. In April, when the price of oil hit $57.27, the price of diesel rose to $2.32 a gallon. Now, with the price of oil over $58 a barrel, it's expected to rise to close to $2.36 a gallon, compared with about $2.15 a gallon for gasoline.

According to Tavio Headley, an economist at the American Trucking Associations, diesel consumption is up 6 percent this June over last June. "It shows the economy continues to grow solidly," he says. "There is increased demand to move goods across the country."

Some of this demand, however, could be from the surge in imports. "The increase in imports from China has changed the way goods get distributed," says Mark Vitner, an economist at Wachovia Securities in Charlotte, N.C. "Now truckers need to travel further to move goods from the ports on the West Coast to the distribution hubs like Atlanta and Dallas."

The view from the road

Many cross-country truckers feel helpless by the price hikes. That's the case with Randy Bolom, who drives for an Illinois moving and storage company. As he unloads a mattress in the stifling humidity of Houston, he says the high price of diesel is hurting his business. "But what are you gonna do? You've got to keep driving."

Two days ago, he filled up in Missouri and spent $231.86 on 104 gallons - paying in cash to get a four-cent-per-gallon break. The day before he spent $2.199 a gallon in Mississippi - and dropped $334.51 to fill the semi's tank. "That was actually pretty cheap," he says, wiping his brow.

However, Tony Coleman, who has been driving a big rig for 27 years, says he's getting frustrated with the recent roller coaster in diesel-fuel prices.

"It will drop down to $1.99 one day and the next shoot right back up to $2.21," he says. He's dropping a load of plastics and resin used in paint at a Sam's Club in South Houston and says he just put $100 worth of fuel into his gas tank Monday. He expects that those 47 gallons will last him a day or two at best.

But he's comfortable with that; the company he pulls for charges an additional 13 percent for every load these days, so he will get some of those expenses back.

"Those fuel surcharges are helping us a whole lot," he says. "But it's tough out there right now. A lot of guys have had to park their trucks and start pulling for other companies because they can't make it on their own."

In fact, Mr. Coleman, with a baseball cap and an easy smile, says he recently stopped driving long hauls and "came back local" because of the high diesel prices.

In New York, some truckers are just absorbing the higher costs on their own. That's the case with Richard D'Asaro, who owns four trucks. "If we figure out what to charge people for a delivery, say $100, and fuel goes up $20, we might charge an extra $10," he says. As long as the price of diesel keeps rising by "nickels and dimes," D'Asaro adds, it's only the larger freight companies that are drastically affected. "Multiply the cost of fuel by 100 trucks, and they'll tell you who's absorbing the cost," he says.

However, a driver for the P. Russo company in Scarsdale insists that the consumers are paying for the high price of fuel. "I have to put the fuel price into the product I deliver to cover expenses," he says. "The owner of the store then passes it on to the consumer."

Even if the truck drivers and store owners are not losing money, he adds, someone always is. "See that guy, Junior?" he asks, pointing to a worker carrying cartons of fruit into Westside Markets. "When prices get really high, I don't pay him."

Kris Axtman in Houston and Anna Levine-Gronningsater and Hadley Cameron in New York contributed to this report.

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