Pocketbook pinch ahead – if soaring oil prices stay high
Consumers would feel the effects in the next few weeks, from the pump to the airline counter.
A sharp increase in the price of crude oil, which is nearing $90 a barrel, could start to hit consumers in their pocketbooks in the next few weeks. Among the effects:Skip to next paragraph
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•Prices at the pump, which had been flat for two months, are expected to rise shortly, perhaps by as much as 10 cents a gallon. On Wednesday, GasPriceWatch.com, reported an overnight rise of 4 cents, which hiked the national average to $2.77 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 impact of the latest surge in oil prices, which started to soar only this month, could be substantial. The rise could reduce consumer enthusiasm, particularly for lower-income Americans. Some economists believe that if the oil price hits $90 a barrel and stays there for a few weeks, businesses could start passing on their higher costs. 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."
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. Some analysts think demand from Asia was a major factor in this shift. "In August and September you normally want to see inventories rise, since demand should be dropping. But inventories have been falling," says Mr. Flynn.
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.
Mr. 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 US dollar puts pressure on producers to raise prices to make up for their lost purchasing power, since most oil is priced in dollars.