Consumers riveted to prices of oil, gas - Spike at pump should be brief in short war

www.indystar.com Ted Evanoff ted.evanoff@indystar.com March 16, 2003

DETROIT -- America's economic jitters were on display in February when oil prices rose and sales of new autos plunged 7 percent. Analysts now are trying to make sense of what might happen to the U.S. economy later this spring if American forces wage war in Iraq. Disaster scenarios suggest an economic recession if the war drags on and Iraq's immense oil fields are set on fire, reducing the volume of oil on world energy markets. Most forecasts, however, take a milder position. They predict crude oil, already at $37 a barrel on the New York Mercantile Exchange, could surge briefly into the mid-$40 range as war begins. Oil at $45 a barrel could push the price of gasoline at Indianapolis service stations to more than $2 a gallon from the current $1.73. Pump prices gradually would fall in a short war, experts say, as long as Iraqi oil still flows and Persian Gulf oil ports stay free of disruptions by terrorists. "You'll have a spike in the price over the first couple of days. But if we have Bush's rosy scenario, the price will come down 10 or 15 cents a gallon fairly soon," said Dennis O'Brien, director of the Institute for Energy Economics and Policy at the University of Oklahoma. What is more worrisome for Indiana's crucial auto economy than $45 oil is the prospect of a prolonged war that erodes the confidence of Americans. Consumers have kept the economy rolling for two years in large part by buying new cars and trucks at a rate of about 16.8 million vehicles annually. Brisk orders kept Indiana auto parts plants and most of the state's 92,000 autoworkers busy. But in the last week of February, real consumer anxiety appeared. Sales of new autos fell 7 percent to an annualized rate last month of 15.5 million vehicles. Half the sales decline traces to mid-month storms that kept shoppers home. That cost the auto industry sales of about 500,000 vehicles. Another 500,000 sales were lost as tensions over Iraq built among the United States, some traditional European allies and the United Nations, said economist Bob Schnorbus. "If it turns into a quagmire in Iraq, it'll play havoc on consumer confidence and business confidence," said Schnorbus, an auto industry analyst in the suburban Detroit office of the research firm J.D. Power and Associates. Schnorbus predicts auto sales will rebound and the industry will wind up with respectable sales of 16.4 million vehicles this year. The forecast assumes a short and successful war. "If that doesn't happen," Schnorbus said about a short war, "the risk of going into another recession is real." While consumers brace for what may come, they already have seen a rapid rise in gasoline prices since last year when crude prices dipped to less than $20 a barrel. Analysts contend the rise in pump prices has less to do with uncertainty over Iraq than the weather. "You have a bunch of I-can't-believe-it situations hitting all at once," said oil analyst Pete Stark of IHS Energy in suburban Denver. An unusually long spell of cold weather depleted natural gas and heating oil burned in furnaces. An unanticipated general strike in oil-producing Venezuela sapped deliveries. And oil companies failed to order enough crude oil for emergencies. "The oil industry has done a terrible job in terms of building oil stocks," said Anthony Cordesman, energy analyst at the Institute for Strategic and International Studies in Washington. Thin oil supplies tend to make gasoline prices jump erratically when oil traders sense a problem that could deplete supplies even more. But Cordesman shrugs off the notion of oil companies intentionally keeping supplies low. "People have been seeing conspiracies since the days of the elder Rockefeller, and that was probably the last time they were right," Cordesman said. "This is a business, a highly regulated business, where people operate with a great deal of transparency." What few in the industry expect is a shortage of oil if war unfolds in Iraq. Russia and OPEC, the Organization of Petroleum Exporting Countries led by Saudi Arabia, insist they will pump enough oil. Analysts figure the commodity price will drop back to an OPEC target range of $25 a barrel by next year. "Our feeling is that with any spike into the range of $40, the price would be short-lived," said Stark in Denver. In Indianapolis, wholesaler Walker Oil Services Inc. is keeping its diesel and gasoline tanks only one-third filled. Mike Walker said fuel prices should ease after the war begins. Then he'll restock fully. Until then, he doesn't want to be caught with full tanks. "If the price suddenly drops 20 or 30 cents at the pump, we can't charge our customers the old price we paid for the oil," Walker said. "We'd just lose money."

Call Star reporter Ted Evanoff at 1-313-417-9215.