Sabre-rattling pushes oil to two-year highs - Manufacturers fear rise will spark slump in Canada and U.S.
www.nationalpost.com Tony Seskus Financial Post, with files from wire services Saturday, February 08, 2003
CALGARY - More sabre-rattling by George W. Bush, the U.S. President, drove oil prices to two-year highs yesterday, stoking fears in the Canadian manufacturing sector rising energy prices could bring an economic slowdown.
Mr. Bush said the United Nations Security Council must enforce its resolution on disarming Iraq, adding the council would be weakened if it allowed Saddam Hussein "to deny and deceive" the UN, whose inspectors are searching Iraq for chemical and biological weapons. Adding to the global tension was Washington's decision to increase its terrorism alert status to orange from yellow, citing an intelligence warning of a "high risk" of terrorist attack.
Prices also rose as low U.S. inventories of heating oil and gasoline sent prices of those products soaring.
U.S. crude rose US$1.09 to hit US$35.25 a barrel -- the highest level since November, 2000 -- extending a 20% price surge this week before dipping to close at US$35.12, up US$96¢. London crude oil hit US$32.50 a barrel, also a two-year high, and last traded at US$32.34, up US90¢.
Oil prices in New York have climbed 79% in the past year, from a low of US$19.64 last February, on Middle East tensions and a long-running strike in Venezuela that has crippled its oil production and tightened global supplies.
The news added to fears energy prices could knock back the U.S. economy. And concerns are growing over how high fuel prices will affect Canadian firms.
"Looking back a couple of years ago, high energy costs were one of the big factors in weakening the manufacturing sector in the U.S.," said Jayson Myers, chief economist of the Canadian Manufacturers & Exporters.
"And if that happens again this time, I think Canadian companies could be faced with a situation where their cost of doing business is going up and their market is actually weakening because of the impact on U.S. industry."
Mr. Myers said companies reliant on oil face a considerable increase in energy costs that will force them to cut spending in other ways to maintain profit margins. "It's going to put further pressure on the bottom line" he said.
"Probably some companies will be looking at downsizing their labour force in some way or having to become much more efficient in what they're doing in order to overcome some of those higher costs."
The U.S. government also said it expected crude oil will stay above US$30 a barrel, on average, throughout 2003 and gasoline prices will rise to near-record highs this spring due to tight crude oil supplies and dwindling inventories.
Judith Dwarkin, chief economist at Ross Smith Energy Group in Calgary, said Canadian oil and gas companies are benefiting from sustained high commodity prices, but added they are also slowing the economy as a whole.
"In macro terms, it's supplying some brakes to our economy," she said. "The cost of transporting goods, the cost of flying, all those things are higher than they would otherwise be, so it's not good from the economic point of view overall."
She said high oil prices will prove a particular challenge to the United States. "The U.S. economy is already driving into an economic headwind," she said.