U.S. Economy Feeling Bite of Costlier Oil

December 28, 2002
By NEELA BANERJEE

With crude oil prices at their highest levels in two years
and showing no sign of abating soon, consumers and
businesses are starting to feel the pinch as the prices of
gasoline, heating oil, and diesel and jet fuel begin to
rise.

Industry analysts and economists warn that because of high
oil prices, Americans in the coming weeks and perhaps
months are likely to be paying more for nearly everything,
from fuel to roofing materials to plastics. And the longer
prices remain high, the greater the threat they pose to the
still-tepid economic recovery, analysts and economists say.


"This would add another weight to the recovery, but not
derail it," said Mark M. Zandi, chief economist at
Economy.com, a consulting firm in West Chester, Pa. "But it
is bad in the sense that we will be struggling to maintain
growth."

The price of crude oil has risen by almost $7, or 27
percent, since early November. In New York, crude oil for
February delivery rose 23 cents yesterday, to $32.72 a
barrel, the highest since November 2000.

Analysts point out that there is a lag of several weeks
between an increase in crude oil prices and a commensurate
rise in the prices of petroleum products. Just this week,
however, the average retail prices of diesel fuel and
gasoline rose by 4 cents, or about 3 percent, according to
data collected by the Energy Information Administration,
the analytical arm of the Energy Department.

"When crude goes up, it's just a matter of time before it
hits you at the pump," said Mary Rose Brown, a spokeswoman
for Valero Energy, a large independent refining company
based in San Antonio. "Our retail guys are saying that an
increase of 5 to 10 cents is a reasonable expectation."

That might prove a conservative estimate, some traders and
analysts said. The forces that are pushing up prices seem,
to oil traders, to be worsening. A general strike in
Venezuela against the government of President Hugo Chávez
has halted nearly all oil production and reduced exports to
a trickle.

Venezuela is the fourth-largest exporter of oil to the
United States, accounting for 14 percent of crude oil
imports. Although government officials in Venezuela have
vowed to restore production soon, oil traders on the global
markets are skeptical, said Rick Smid, an energy futures
broker at Fimat, a subsidiary of Société Générale.

The Venezuelan shortfalls have buffeted the market as
worries rise again about a possible war between the United
States and Iraq and its effect on oil supplies from the
Persian Gulf.

For high oil prices to have a great effect on the economy,
they have to be sustained for more than a month at $30 a
barrel or more, said David Costello, an energy analyst at
the Energy Information Administration. That prospect seems
increasingly likely, especially as both sides in the
Venezuelan dispute retrench.

It takes a month or two for higher crude oil prices to work
their way through the refining and retail systems and to be
felt by consumers, Mr. Costello said. That explains why
price increases on the retail level are only being seen
now, he and other analysts said. Conversely, if the
Venezuelan conflict were resolved now, it would still take
several weeks for retail prices to fall, they noted.

Industries heavily reliant on oil are already feeling the
bite, Mr. Zandi and others said. The makers of textiles,
paper, chemicals and plastics will be stuck with higher oil
bills. "It will affect airlines and trucking
significantly," Mr. Zandi said. "The airlines are already
hard pressed, and this is one more thing to push them under
water."

In the last month, the price of jet fuel at New York Harbor
has risen nearly 15 percent, to 87.23 cents a gallon,
according to the Energy Information Administration.

The region that relies most heavily on heating oil, the
Northeast, may also face sharply higher prices, Mr. Zandi
and others said. Heating oil prices are 18 percent higher
than they were a year ago, according to the Energy
Information Administration.

"New York City will be hit very hard," Mr. Zandi predicted,
"much more than a place like Dallas or Southern
California."

The effects of higher oil prices may ripple through
industries that, at first glance, seem remote from oil.
Consider roofing. The best asphalt for roofing comes from
"heavy" crude oil produced in Venezuela. With those
supplies gone, "people are scrambling already to find
supplies," Ms. Brown of Valero said. "The cost of roofing
will go up."

If the conflict in Venezuela were resolved and striking
workers from the state oil company returned to their jobs,
that would certainly bring more crude oil into the market
and gradually deflate high prices. But few people believe
such an outcome is likely anytime soon.

Instead, industry experts look to the Organization of the
Petroleum Exporting Countries, of which Venezuela is a
member. Other members said at a meeting earlier this month
that the group would make up for shortfalls of Venezuelan
exports if the strike continued.

OPEC members like Saudi Arabia and Kuwait are among the few
countries that have the spare production capacity to
replace the Venezuelan oil. But it remains uncertain what
steps OPEC has taken so far. Moreover, it takes about 40
days for oil to be shipped from the Persian Gulf to the
United States, which may mean that oil supplies in the
Western Hemisphere may only be replenished later in
January.

"The key thing now is how quickly and on what scale the
other OPEC producers step up their production," said Daniel
Yergin, the chairman of Cambridge Energy Research
Associates, "and that will determine in a week or 10 days
where oil prices will be.

"You could have replacement supplies in late January from
the Persian Gulf. But all of that assumes that nothing
happens anywhere else."

http://www.nytimes.com/2002/12/28/business/28OIL.html?ex=1042286602&ei=1&en=783fc279f3285786