Oil Companies Stand to Gain from Surging Prices

Rising Oil Prices Beginning to Hurt U.S. Economy

April 6, 2011

AP - ...High energy prices are "putting a drain on consumer budgets," says James Hamilton at the University of California, San Diego.

"To the extent they're having to spend more on gasoline, they have to make cutbacks elsewhere."

Two-thirds of Americans say they expect rising gasoline prices to cause hardship for them or their families in the next six months, according to a new Associated Press-GfK Poll. The telephone poll conducted March 24-28 had a sampling error margin of plus or minus 4.2 percentage points.

Seventy-one percent say they're cutting back on other expenses to make up for higher pump prices. Sixty-four percent say they're driving less. And 53 percent say they're changing vacation plans to stay closer to home.

"I try to leave the car parked at home all day Saturday," says Curt Lindsay, who commutes an hour each way to his job as a computer systems administrator outside Washington, D.C. "I'd rather not spend the money on gasoline."

Since gasoline prices topped $3 a gallon, Lindsay has also been trying to drive more slowly to conserve fuel. His co-worker Albert Zaza canceled family trips to New York and Boston after the cost of filling up his Honda CRV surged from $35 to $47. Zaza spends four to five hours in traffic each day and has to fill up every other day.

Rising fuel prices are pinching businesses too.

In Tipton, Iowa, Grasshopper Lawn Care is tacking 5 percent onto customers' bills to compensate for higher fuel costs. The company has to buy more than 8,000 gallons of gasoline a year. It plans to keep the surcharge until gasoline prices dip back below $3 a gallon, owner Dan Kessler says.

The oil shock and global instability are diluting the benefits of an improving job market. The unemployment rate, though still high, is at a two-year low. And the economy has just produced the strongest two months of hiring since before the recession began.

Bernard Baumohl, chief economist at the Economic Outlook Group, has slashed his estimate for growth this year to 2.8 percent from 3.5 percent. In 2010, the economy grew 2.9 percent.

Consumer spending accounts for about 70 percent of the economy. After adjusting for inflation and for seasonal factors, consumers spent 0.3 percent more in February than in January.

But that's unlikely to last. Gasoline prices are surging just as inflation-adjusted incomes are falling. More expensive gas is draining much of the cash Americans are receiving from a cut in Social Security taxes this year.

Zandi estimates that higher oil prices shaved 0.5 percentage point from growth in the January-March quarter. He predicts the economy grew 2.6 percent during the quarter.

If oil prices average $100 a barrel for the year, Zandi says, growth will be 0.3 percentage point lower than if prices had stayed at last year's level — an average of less than $80 a barrel. A few months of $125-a-barrel oil would slash economic growth by a full percentage point, Zandi says. And a few months at $150 a barrel could push the economy back into recession.

Surging oil prices don't hurt everybody in the United States. Oil companies, for example, stand to gain. In 2008, Exxon Mobil Corp. earned $45 billion — a record for a U.S. company — after oil prices hit a record $150 a barrel.

Oil services companies such as Halliburton Co., Schlumberger Ltd. and Baker Hughes Inc. also benefit as the oil industry rushes to find and produce more oil. And the products of biodiesel and other alternative energy companies become more competitive the higher oil prices go.

In a speech last week, Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, offered hope that higher oil prices won't persist long enough to do much damage.

"Large increases in food or energy prices tend to be temporary," Pianalto said. "History shows that they are often followed by sharp declines."

But Mark Pawlak, a market strategist at Keefe, Bruyette & Woods, says he worries about a repeat of what happened to the economy last year: It built momentum at the start of 2010, only to stall in the face of a European debt crisis and a run-up in oil prices from February to April.

Oil Rises 30-month High Above $108

April 4, 2011

AP - Oil prices jumped to fresh 30-month highs above $108 a barrel Monday as the conflict in Libya extended market concerns about supply risks and signs of a recovering U.S. jobs market bolstered optimism that global crude demand will strengthen.

By early afternoon in Europe, benchmark crude for April delivery was up 30 cents at $108.24 a barrel in electronic trading on the New York Mercantile Exchange. Earlier in the session, the contract reached $108.78, while on Friday it rose $1.22 to settle at $107.94.

In London, Brent crude for April delivery was up 60 cents to $119.30 a barrel on the ICE Futures exchange.

The U.S. said Friday its economy added 216,000 new jobs last month and the unemployment rate dropped to 8.8 percent, boosting trader confidence that more workers will help fuel consumer spending.

Investors are also closely watching Libya, where a standoff is developing as forces loyal to Moammar Gadhafi control most of the western half of the OPEC nation while rebels have seized most of the eastern coast.

On Monday, rebels pushed into the strategic oil town of Brega but came under fire from Gadhafi's forces.

"As long as the fighting for major Libyan oil towns Ras Lanuf and Brega continues, a resumption of oil shipments is unthinkable," said analysts at Commerzbank in Frankfurt.

Before the conflict, Libya was exporting 1.6 million barrels a day — about 2 percent of the world's supply.

"OPEC has also shown that it is taking the Libyan outage seriously," said a report from JBC Energy in Vienna. "Libyan production declined by just over 1 million barrels a day in March, but total OPEC production fell by only 500,000 barrels a day as other OPEC members — mainly Saudi Arabia, the United Arab Emirates and Kuwait — picked up the slack."

Some analysts say oil prices — which have jumped about 29 percent since Feb. 15 — will likely begin to fall unless the U.S. announces a major new program to provide cheap money or violent protests spread in the Middle East and North Africa.

"For prices to continue their ascent, a new event or exacerbation of existing events will be necessary," said Richard Soultanian of NUS Consulting. "Should this come to pass, we believe prices will spike."

In other Nymex trading in April contracts, heating oil rose 1.16 cents to $3.1461 a gallon and gasoline added 0.8 cents to $3.1593 a gallon. Natural gas futures were down 4.4 cents at $4.318 per 1,000 cubic feet.

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