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A year ago, the price of oil was less than $20 per barrel. At the start of 2003, it was more than $30, a two-year high, fueled by the strike in Venezuela and worries over how possible U.S. military action in Iraq will affect the flow of oil from the Middle East. Just how much should we worry about higher oil prices and their potential impact on the economic recovery?

There's plenty of reason for concern. The last five recessions were all preceded by substantial hikes in oil prices. Indeed, the tripling in the cost of oil during 1999 and 2000, from $12 per barrel to $36, may well have received short shrift for its role in provoking the 2001 downturn. Now, just as the economy shows evidence of emerging from its autumn swoon, based on surprisingly strong December readings on manufacturing activity and car sales, the prospect of costlier energy once again looms large in the outlook.

Higher energy costs boost inflation, cut into economic growth, and significantly increase the cost of doing business in a broad range of industries--especially now, when passing along higher costs is virtually impossible for many companies strapped by a lack of pricing power. That means profits take it on the chin. Already-struggling airlines are especially sensitive to higher fuel costs, but other energy-intensive industries, such as steel, lumber, paper, chemicals, and plastics, are also vulnerable.

RULE OF THUMB. Still, outside of the worst-case scenarios for the Middle East in coming months, the U.S. should be able to weather $30 oil or even a temporary spike to a higher level, especially given the stimulus coming from the Bush Administration's new tax package. Moreover, market fundamentals and long-term trends imply that oil will be cheaper later this year.

Economists have a rule of thumb for gauging the macroeconomic impact of higher oil prices: Every $10 per barrel rise that lasts for a year cuts economic growth by about 0.5% and adds about 1% to inflation. By that rubric, even if oil averages $35 in 2003, up from an average of about $25 in 2002, the recovery should be little worse for wear.

But the real world doesn't always operate the way econometric models, whose projections are based on average historical trends, say it should. In reality, the response to higher oil prices is no clear-cut, straight-line relationship. That is, the impact of going from $15 oil to $25 oil appears to be a lot smaller than the jolt that occurs from, say, $35 to $45. Models tend to underestimate the adverse effects of oil spikes, and most fail to predict a recession, even at very high price levels.

CONSUMERS FEEL THE PINCH. Oil price spikes going back to the 1970s bear this out. So a sustained move from $25 to $45 oil would likely do more harm than just shave one percentage point from economic growth. It could even tip the economy into a recession.

Consumer spending, a factor crucial to the recovery, tends to suffer the brunt of the blow from higher oil prices. Another rule of thumb is that every $10 hike in oil increases household energy costs by about $50 billion. Unless consumers save less, which is unlikely now as households try to rebuild their savings amid economic and war uncertainties, that's $50 billion unavailable for spending on discretionary items, such as another sofa or a snazzy laptop. That drain could subtract up to 0.75% from the growth in real consumer spending over a year's time.

The impact on consumer prices is already starting to show up. Based on current and expected levels of prices for gasoline and heating oil, energy costs, which make up 6% of the consumer price index, will add about 0.1% to the rise in the December index and up to 0.3% to the January index. That means January inflation will be running at about 3%, up from only 1.1% at the start of last year.

VENEZUELAN TURMOIL. It's important to note, however, that core inflation, which omits energy and food, is actually falling, due mainly to a sharp slowdown in housing costs, which account for more than a third of the core CPI. Costlier energy is being partly offset by cheaper mortgage payments, reflecting multi-decade lows in mortgage rates.

Still, even with no further rise in energy costs from the January level, the growth in first-quarter consumer spending over the fourth quarter would be depressed by about 0.5%, at an annual rate. Beyond that, though, the outlook depends on how events in Venezuela and the Middle East will play out.

The six-week-old strike in Venezuela, which had been supplying 10% of U.S. crude, has cut the country's output to only 20% of its 3 million barrels-per-day capacity. And analysts doubt that President Hugo Chavez can keep his pledge to restore full capacity by mid-February. Partly because of the strike, U.S. crude inventories are 11% below their year-ago level, according to the American Petroleum Institute.

SHADOW OF WAR. For now, at least, the price effect of Venezuela's reduced production is mitigated by the desire of other OPEC members to keep the global flow of oil on an even keel. OPEC members have an informal pact to keep prices in the $22-to-$28 range, a level that OPEC believes will generate a steady flow of oil revenues without damaging global growth, which would depress receipts. To that end, OPEC has agreed to increase output by 1 million to 2 million barrels per day to make up for Venezuela's shortfall, and prices are off their recent highs.

Yet Iraq still casts the biggest shadow on the outlook. Analysts offer only general scenarios. One: An uneasy peace with Saddam Hussein relieves war worries and allows oil prices to head back into OPEC's target range. Two: A quick war ousts Saddam, resulting in a sharp price drop, with obvious economic pluses. Even this best possible case, however, may not yield full benefits immediately, since huge investments will be needed to fully resurrect Iraq's oil infrastructure.

But it is fear that the war will go badly and the flow of oil will be disrupted that is keeping prices up right now. On this one, who knows? One extreme-case scenario: A nuclear device contaminates key oil fields for years, sending prices over $100 per barrel.

REASONS FOR HOPE. Barring that, the best bet is that oil-market forces will reassert themselves later this year, allowing prices to fall. First, OPEC has learned the value of stable prices. Second, inflation expectations are low, meaning that a temporary oil spike will not fuel a generalized pickup in inflation. And three, higher oil prices have much less impact on the economy than they did in earlier years. Because the U.S. is more energy-efficient, it now derives twice as much gross domestic product from the same amount of energy used in the 1970s.

Nevertheless, oil is still a crucial factor in the economic outlook. So in the coming months, fill 'er up, lock in the best available contract for winter fuel oil -- and keep your fingers crossed

www.lancastereaglegazette.com By HOLLIE SAUNDERS The Eagle-Gazette Staff

The up and down prices of gasoline at the pumps may be a way of preparing people for a possible sharper increase by spring.

According to the Ohio Auto Club, the current Ohio price average is currently $1.40, which is 12 cents higher than a month ago, and 24 cents more than a year ago, even though it is 6 cents less than the national average.

The national average is currently $1.46, which is 8 cents higher than a month ago and 34 cents more than a year ago.

Gasoline prices nationwide are expected to average $1.54 a gallon by mid-spring. Summer prices are likely to be even higher as fuel demand historically increases in June with the coming of the summer driving season.

The Ohio Auto Club cited reasons for the current prices as because of declining inventories of crude oil in the United States; and a recent increase in world oil prices to as much as $32 per barrel.

The cost of regular gasoline at Speedway on North Memorial Drive, Lancaster, dropped on Friday from $1.47 to $1.45.

"It's like a roller coaster, constantly going up and down," Speedway employee Pam Lynch said. "People accept it. You need it, so you have to pay whatever it is."

Adriana Escalante of Athens said she tries to cope with the increasing cost of gas.

"I avoid driving as much as possible since it's so expensive," Escalante said. "There's not a lot of money and good jobs are scarce, so you do the best you can."

Escalante is a member of the Ohio National Guards. She said she doesn't really see how foreign affairs affects the current price of gasoline.

"I think the government sets the standard for gas prices based on where the economy is at," she said.

Evan Cansler of Mansfield is a heavy equipment operator.

"The type of work I do, I have to drive, and I have to buy gas. I have to roll along with what comes along. I can't worry about what the gas prices are or will be," Cansler said. "As far why the prices are going up, it goes deeper than a lot of people realize."

At Dave and Mike's Marathon, 159 N. Memorial Drive, Lancaster, price for regular gas also dropped on Friday -- from $1.53 to $1.48.

Tom Winezer of Lancaster, an employee at Marathon's said the prices have not affected business.

"People complain a lot, but they still pay," Winezer said. "There's not a lot you can do about it."

Employees at Meijer's Gas Station, 2900 Columbus-Lancaster Road N.W. said their gas came down a few cents to $1.45 on Friday.

OPEC members, meeting in Vienna Austria, agreed Sunday to boost the cartel's oil production target by 6.5 percent to stabilize a world market jittery over a crisis in Venezuela and the possibility of war in Iraq.

The increase of 1.5 million barrels a day -- to 24.5 million barrels -- would take effect Feb. 1, OPEC President Abdullah bin Hamad Al Attiyah told a news conference at the group's headquarters in Vienna.

Al Attiyah confirmed that the Organization of Petroleum Exporting Countries wants to keep prices of its benchmark blend of crudes at $22-$28 per barrel. Friday prices hovered around $30.

Whie House officials, have said repeatedly in recent weeks that no consideration is being given at this time to use any of the 592 million barrels of oil kept in the emergency reserve to ease supply pressures.

(The Ohio Auto Club and the Associated Press contributed to this story)

www.forbes.com Reuters, 01.13.03, 8:46 AM ET     By John Chiahemen

LAGOS, Jan 13 (Reuters) - Multinationals producing Nigeria's oil said on Monday they were primed to immediately boost production after OPEC's agreement to raise the cartel's output ceiling to stave off a global price shock.

Oil companies in Nigeria have been complaining for months about production curbs of the Organisation of Petroleum Exporting Countries, which came after they had invested hundreds of millions of dollars in new Nigerian fields.

The Nigerian unit of Royal Dutch/Shell <RD.AS><SHEL.L>, the country's top producer, said it expected to add output from its new EA oilfield following OPEC's decision on Sunday to raise quotas for its 10 members.

"We have extra capacity from a number of oil wells not yet put into operation," Shell Nigeria spokesman Don Boham said.

"The EA is a new offshore project which we started slowly, but which we intend to prime up," he said.

But being a new well, it could take a few months for oil to flow significantly from there, he added.

Shell said the shallow water EA came on stream last month but was only producing at a fraction of its capacity of about 140,000 barrels per day (bpd).

Shell is operator of the field with state-run Nigerian National Petroleum Corp (NNPC), France's TotalFinaElf <TOTF.PA> and Italy's Agip <ENI.MI> as shareholders.

Shell said earlier this month its crude output in December rose to its highest level for the year at 845,000 bpd.

The multinational, which accounts for almost half of Nigeria's crude production, saw its output fall in the first half of 2002 to an average of around 660,000 bpd due to Nigeria's stringent OPEC compliance.

But output rose steadily in the second half after the country loosened its grip on compliance.

Other fields due to come on stream in Nigeria this year include two in the country's promising new deep sea frontier. Agip is expected to tap first oil from its Abo deep offshore field next month while TotalFinaElf should start production from its 125,000 bpd Amenam field around June.

SHARE OUT In the quotas shared out in Vienna on Sunday to stem a price spike threatened by a strike in Venezuela and war in Iraq, Nigeria was allocated an additional 124,000 bpd to bring its quota to 2.018 million bpd.

A senior official at ChevronTexaco (nyse: CVX - news - people) Nigeria said the U.S. major did not need to bring on any additional capacity to take advantage of an increased output share.

"We're way under capacity," the official said, quoting a figure of between 80,000 and 100,000 bpd below capacity.

A spokesman for ExxonMobil (nyse: XOM - news - people) said Nigeria's second largest producer had the capacity to raise output beyond its assigned 365,000 bpd.

The NNPC will assign new output figures to its foreign joint venture partners over the next few days based on its assessment of their capacities, oil company officials said.

Although production capacities of the oil companies are monitored by NAPIMS, NNPC's investment arm, industry sources say higher quotas are still subject to intense lobbying at the state company's headquarters in Abuja.

"I am sure everybody will be there lobbying for new quotas," one company official told Reuters.

www.middle-east-online.com Algerian embassy in US says Algerian assistance to Venezuela's oil industry is commercial matter between two.

ALGIERS - US officials in Algeria have played down reports of a standoff between the two countries over the decision by Algiers to send experts to Venezuela to aid its strike-hit oil industry.

The official APS news agency said late Sunday that the US embassy had issued a statement here in the wake of a rash of reports in the Algerian press recounting a diplomatic uproar between the two nations.

"Contrary to these reports, the Algerian ambassador in Washington, Driss Jazairi, has not been summoned to the State Department," it quoted the embassy statement as saying.

Le Matin newspaper had reported Jazairi had been called to the State Department to hear of the White House's unhappiness with Algeria's "unacceptable meddling in Venezuelan affairs."

APS reported the embassy saying: "Algerian assistance to Venezuela's oil industry is a commercial matter between the two."

Venezuela has been rocked by a weeks-long crippling general strike aimed at ousting President Hugo Chavez from power.

OPEC energy ministers Sunday agreed to increase oil output by 1.5 million barrels per day to make up a shortfall in the market caused by fears of military action in Iraq and falling exports from strike-hit Venezuela.

news.bbc.co.uk Monday, 13 January, 2003, 05:59 GMT

Increased supplies are little comfort for the US

Oil prices have remained unmoved as Organisation of the Petroleum Exporting Countries (Opec)'s agreement on Sunday to increase supplies is considered inadequate to meet US needs.

Oil has been trading at about $30 per barrel as a US war with Iraq and strike in Venezuela, the world's fifth largest exporter, has pushed US reserves to near 26-year lows.

Opec "stabilising" supplies

"There are delays in getting oil from the Middle East to the US," said David Thurtell, commodities strategist at the Commonwealth Bank in Sydney.

"The global market is going to remain tight with ongoing war fears," he added.

Deliveries from the Middle East take between four to six weeks to reach the US.

US light crude see-sawed in Asian trade, falling by almost 50 cents to $31.20 a barrel, then rising above its opening price before returning to $31.68 at 0512 GMT.

Trade on the International Petroleum Exchange (IPE) in London, the world's main oil market, begins at 0900 GMT.

Supply threats

The Venezuelan strike and the looming threat of war had pushed US crude prices to a two-year high of $33.65 at the end of December.

The high cost of oil could threaten the global economy which is still struggling to show any significant growth.

Oil shipments by Venezuela, the world's fifith biggest exporter which supplies 13% of US needs, still down to about 20% of normal export levels.

Iraq sells up to two million barrels per day on the international market but that would be stopped if there was a war.

Opec increased official production by 1.5 million barrels per day (bpd) during the emergency meeting in Vienna.

"Opec is trying to send a very strong message that it will do its utmost to stabilise demand and supply," said the cartel's president Abdullah bin Hamad Al Attiyah.

Another Opec meeting is scheduled on 11 March.