Oil prices high, going higher

Perhaps you've noticed higher prices at the gas pump recently. Get used to it.

Oil prices have soared from $11 a barrel in December 1998 to $27 a barrel this month - the highest price in nine years. And with a diplomatic dispute brewing in - where else? - Iraq, economists predict that oil prices could rise as high as $30 a barrel by the end of the year.

What this means to American consumers is likely to be higher prices for everything from heating oil to the traditional Christmas ham. And some economists say that a moderate amount of inflation could creep into what is currently a strong, healthy economy.

"This is going to take a chunk out of some people's budgets, but I'm not sure people are going to turn down their thermostats," says Benjamin Friedman, an economics professor at Harvard University in Cambridge, Mass.

What economists and oil-industry watchers are talking about is a modest slowdown of the US economy over the beginning of next year. Behind these higher oil prices are a combination of forces, from the impending arrival of winter in the Northern Hemisphere to the economic revival of Asia. But the greatest force behind today's higher fuel prices is the newly disciplined Oil Producing and Exporting Countries.

Last March, OPEC began cutting back oil production after falling Asian demand and rising Arab production left the world in a glut of cheap oil. The cuts brought oil prices from a near 50-year low of $11 a barrel in February to $25 a barrel in October.

But the nations of OPEC aren't the only ones benefiting from rising oil prices. The war-torn nation of Iraq, hoping to use the current tighter oil market as a bargaining chip, this week refused to extend its current agreement to sell oil through the United Nations in exchange for food and humanitarian supplies.

With only a few weeks of humanitarian supplies in hand, Iraq is unlikely to maintain its defiant stance for long, analysts say. But in today's tight oil market, just the threat of a cutoff of 1.5 million barrels per day has pushed oil prices up $1.50 in two days.

"We're certainly in a tight market now, and Iraq recognizes the consequences of that put it in a very strong strategic position," says George Beranek, an economist at the Petroleum Finance Corp. in Washington.

Like many observers, however, Mr. Beranek believes Iraq could do without oil revenues for only two months at most, and that it stands to lose its market share altogether to other oil-producing competitors.

Sarah Emerson, director of the Boston-based Energy Security Analysis Inc., agrees that the Iraqi squabble is "a bit of a sideshow," but she says rising fuel costs over the next few months will be felt by Americans, particularly those who drive gas-guzzling sport utility vehicles.

Over the next few months, rising oil prices could be felt through all sectors of the economy. A $4 increase in crude oil prices generally translates into a 10-cent hike in gasoline prices, and oil prices have already shot up $16 since March 1999.

This spike could affect the price of everything that is transported by trucks or airplanes, from California produce to Texas computers to Iowa hams. Indeed, both Delta and American Airlines announced this week they will raise fares by 3 percent to cover fuel costs. A projected 40 percent increase in heating-oil prices over the next few months could have a profound effect on the Northeast.

"In our worst-case scenario, I'd say that oil prices could go up to $30 a barrel and then come down over the course of 2000," says Cynthia Latta, an economist at Standard & Poor's DRI forecasting group in Lexington, Mass.

Under this scenario, the US economy would continue to grow in the first quarter of the year, but at a slower rate - the difference between 1.7 percent growth and 0.6 percent growth.

Over a year, $27 a barrel for oil could push the US gross domestic product down by one-half a percentage point, a significant number for economists. But most analysts say there is simply too much supply in the marketplace to sustain such high prices. In fact, the very fact that oil prices rose only $1.50 after the Iraqi threat indicates that Wall Street knows a bluff when it sees one, says Ed Porter, an economist for the American Petroleum Institute.

Historically, when 2 million barrels of daily oil production are removed from the market, "an increase of $3 to $5 a barrel would not be out of line," he says. Out in the Oil Patch, the return of higher oil prices has been greeted with something just short of jubilation. Texas is about 75 percent less sensitive to oil prices than it was in 1982, but oil still generates a $75 billion hunk of the state economy.

For Tulsa, Okla., oil man Dewey Bartlett, $27 a barrel "is a price that allows independent oil producers to exist." "Our first goal is to recoup the money we lost," says Mr. Bartlett. "Next, we want to start drilling. We haven't drilled in two or three years."

(c) Copyright 1999. The Christian Science Publishing Society