War time may lead to high gas prices
www.star.niu.edu By Ken Moritsugu (KRT)
WASHINGTON - While uncertainty about a war against Iraq has contributed to a sudden spike in oil prices, those prices could remain high even if a U.S. invasion achieves quick victory.
And even if crude oil prices fall, gasoline prices likely would remain high at least into late spring, analysts say. It generally takes one to two months for oil price shifts to feed through to gasoline. Any postwar declines could be offset by upward pressure on pump prices as demand picks up with the start of the summer driving season.
The nationwide average price for unleaded regular is $1.67 a gallon, according to the American Automobile Association, 54 cents higher than a year ago.
Natural gas prices also have risen, pushing up heating and electricity costs for many homes and businesses. High energy prices slow economic growth and increase the chances of recession.
"Unless it reverses itself quickly, the energy shock is big enough to threaten the economy," said Richard Berner, the chief domestic economist at the Morgan Stanley investment bank in New York. He put the chance of recession at one in four in a report to clients on Friday. "While it's anyone's guess how long it will last, the fundamentals don't suggest quick relief," he added.
Global Insight Inc., an economic consulting firm in Lexington, Mass., doesn't expect gasoline prices to ease from today's level until July or August at the earliest.
Most analysts attribute part of the rise in oil prices to fears about potential war-related disruptions to oil production. The analysts conclude that a swift and successful war, with minimal damage to oil wells, would eliminate this "war premium" from the price.
Certainly, war rumors have created short-term havoc in oil markets, pushing the price of oil on the New York Mercantile Exchange up to $37.70 a barrel on Wednesday - the highest since the Iraqi invasion of Kuwait in 1990 - before dropping back to close at $36.60 on Friday. A barrel is 42 gallons.
"I call it March missile madness," said Phil Flynn, a futures trader at Alaron Trading in Chicago. He attributed the midweek run-up in oil prices to the market getting "a tad ahead of itself on war concerns."
Yet some economists argue that oil prices would be high today with or without the so-called war premium. They note several other factors, such as low inventories of crude oil, high demand for heating oil because of the cold winter and the disruption of production in Venezuela due to political unrest.
These factors alone are enough to account for much of the 45 percent rise in oil prices from $25 a barrel since November, said Dave Costello, an economist with the federal Energy Information Administration.
Phil Verleger, a California-based energy consultant, doesn't believe the war premium exists at all, so a quick end to a war won't bring down oil prices, he predicted, unless the United States also were to release oil from its Strategic Petroleum Reserve.
One problem: High oil prices, at least for a while, can be a self-sustaining proposition.
The refiners who make gasoline and other oil-based products don't want to stock up on oil while it's so expensive. Any company that buys oil at $37 a barrel would be at a competitive disadvantage if the price drops.
Traders expect prices to fall eventually. Futures contracts for oil for delivery in December closed at under $29 a barrel Friday.
If refiners only buy enough oil to keep going, inventories remain low, which in turn helps keep prices high.
"No one wants to bite the bullet and buy crude, because they're afraid of a price collapse," Verleger said.
If a war were to go badly, oil prices could shoot up instead.
Should the price of crude reach $50 a barrel and remain there for several months, the chances of recession would rise sharply.
© 2003, Knight Ridder/Tribune Information Services.