Dow is down, oil prices up as nervous markets eye Libya's Qaddafi

The oil markets are now awash in rumors, such as one on Wednesday that Libya’s besieged leader, Col. Muammar Qaddafi, plans to destroy his country’s oil wells.

This unfounded rumor and many more like it are among the reasons the price of oil rose above $100 a barrel during trading on Wednesday, ultimately closing at $98.10 a barrel.

“It shows the tensions and fears if Qaddafi engages in a scorched-earth policy and destroys the country’s infrastructure,” says John Kilduff, founding partner of Again Capital in New York. “If that were to happen, it could bring the price of oil up to $110 or $115 a barrel – that’s what taking 1.1 million barrels of oil per day off the market is worth.”

Muammar Qaddafi: Five ways Libya's leader has held onto power

There are no signs that Colonel Qaddafi has started any program to destroy Libya’s energy production. Nevertheless, fears about the prospect of sharply higher oil prices rippled through Wall Street, where the Dow Jones Industrial Average fell 107.01 on Wednesday to 12105.78.

Although higher oil prices would contribute to inflation, their larger threat to the economy would be a stall or slowing of the recovery, says economist Joel Naroff of Naroff Economic Advisors in Holland, Pa.

“You would clearly be taking money out of the pockets of consumers, who have not had much chance to catch their breath and spend again,” he says. “With these prices, a good portion of the cuts in Social Security taxes [part of the tax compromise at year's end] could get pumped into gas tanks, not the economy.”

On Wednesday, the average price of a gallon of gasoline was $3.19 a gallon, up 8 cents a gallon from a month ago and 52 cents a gallon higher than a year ago, according to AAA, the motorist club.

“There are only two states – Missouri and Wyoming – that are below $3 a gallon,” says Nancy White, an AAA spokeswoman in Heathrow, Fla.

In fact, the price of fuel in some states is moving closer to $4 a gallon, according to AAA. Gasoline now averages $3.74 a gallon in Hawaii, $3.63 in Alaska, and $3.58 in California.

These prices are already higher than the Energy Information Administration, part of the Department of Energy in Washington, had expected to see. Three weeks ago, EIA had forecast that gasoline prices would rise from $3.10 a gallon to $3.24 a gallon in July. “Of course, in that forecast, we did not anticipate the extent of the growing unrest in the Middle East,” says Tancred Lidderdale, an EIA analyst of short-term energy supplies.

The government agency expected the price of crude oil would rise to $94 a barrel by July and August, $5 lower than its current price.

Because it takes several weeks for price hikes of crude oil to show up in higher prices at the pump, Mr. Lidderdale is anticipating that the price of gasoline will keep rising during the next few weeks. “Beyond that, it’s difficult to say which way prices will go,” he says. “It just depends on how things evolve over the next days and months.”

If events in the Middle East settle down, there is plenty of oil around, especially in the US, says Mr. Kilduff of Again Capital."oil “If things quiet down, we could see a significant drop in price, and if Qaddafi goes without any damage to the oil infrastructure, we could see a quick drop of $5 to $7 a barrel,” he predicts. “And if there are no problems in Saudi Arabia, that will take some of the security premium out of the price.”

Muammar Qaddafi: Five ways Libya's leader has held onto power