Oil prices' relentless rise

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.

"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."

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."

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