Terror worries fuel rise in crude oil prices--Consumers dealt another blow in stalled economy

jsonline.com By JOHN SCHMID jschmid@journalsentinel.com Last Updated: May 20, 2003

From the political chaos in Saudi Arabia to terror anxieties in the United States, events are conspiring to elevate gasoline prices and add a new edge of nervousness in a stalled American economy. Economy

Photo/File An oil worker operates a valve gear at an installation near Baghdad, Iraq, in 2000. Crude oil prices fell in the immediate aftermath of the Iraq war, but recent terrorist bombings in Riyadh, Saudi Arabia, sent prices higher.

Graphic/Journal Sentinel Oil and the Economy's Health

Crude oil prices, which fell in the immediate aftermath of the Iraq war and briefly lifted hopes that cheap fuel would drive a recovery in the U.S., have been rising again.

Benchmark crude prices on the New York Mercantile Exchange gained 45 cents, or 1.6%, settling Tuesday at $29.28 a barrel, the highest level in a month.

"This will short-circuit the decline in gasoline prices," said George Gaspar, energy analyst at Robert W. Baird & Co. in Milwaukee.

In a world that burns 75 million barrels of petroleum every day, experts agree that each spike in oil prices is the equivalent of tapping on the brakes of commercial activity.

"The world economies function a lot better at $18 a barrel than they do at the current price," said James Williams, president of Arkansas-based WTRG Economics, an energy analysis group.

In the aftermath of the Iraq war, falling crude oil prices were supposed to provide a much-needed boost to a war-weary nation. And for a brief time, it seemed they would.

World market prices for crude oil, which traded above $30 a barrel for much of the year, declined after the war to just above $25 per barrel.

But last week's terrorist bombings that rocked Riyadh, the capital of Saudi Arabia, have added new jitters to oil markets and sent prices higher. Adding to the nervous climate, Saudi and U.S. officials this week issued warnings to Americans at home and abroad to brace for more attacks. The federal government Tuesday raised the terrorism alert level to orange - meaning there is a high risk of a terrorist attack - as the U.S., Britain and Germany closed their embassies in the Saudi kingdom.

Volatility to stay

According to a rule of thumb, every $1 increase in crude prices amounts to a 2.5-cent rise in average unleaded pump prices. "So if prices just rose $5, you pay another 12 cents at the pump," Williams said.

The national price for regular unleaded fuel averages about $1.53 per gallon, Gaspar said.

Roller coaster oil prices illustrate another economic reality, as well. Oil prices, which are one of the most fundamental determinants of economic direction, have seldom been more volatile than they have been in the past two years.

And that volatility is here to stay, experts concur.

Political uncertainty extends well beyond Saudi Arabia. Of the 11 nations in the world's oil cartel, the Organization of Petroleum Exporting Countries, four of them are in the throes of political instability: Venezuela is stricken with a political leadership crisis and strikes, Nigeria is battling civil strife, Iraq's chaos means a slower-than-expected resumption of oil exports, and Saudi Arabia now finds itself in the epicenter of the anti-terror war.

"We have to get used to the fact that we have a continuous period of unsettled political affairs around the world," said Mark Baskir, portfolio manager in New York for the energy fund at Strong Financial Corp.

"The bottom line is that the uncertainties are not going away any time soon and they are being factored into the price of oil."

Floor under prices

The advent of summer driving demand will keep a floor under gasoline prices, and so will low U.S. stocks of crude oil and gasoline, analysts said. "We have near-historic lows of supplies of oil," Baskir said.

"The point is that volatility and uncertainty will be the norm for some time to come," Williams said. Because the inventories are so low, the potential for prices to increase amid that volatility is greater than any potential decrease in prices, he and other economists said.

"Part of the optimism was that we won the war and people thought someone only needed to turn a valve and all this crude will come back on the market," Williams said, adding:

"It just doesn't work that way. It will be some time before Iraqi crude returns to the market."