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Wednesday, March 5, 2008

GAS PRICES SOAR

problems became clearer Tuesday
with the release of figures showing that prices at the producer level
rose 1 percent in January from December, driven in large measure by
energy costs. Compared with a year ago, prices were up 7.4 percent,
the worst producer price inflation in the United States since 1981.

Other new figures showed that home prices around the country are
falling at an accelerating pace, suggesting no end is in sight for the
housing slump.

As of Tuesday, regular gasoline was selling at a nationwide average of
$3.14 a gallon, according to AAA, the automobile club, up from $2.35 a
year ago. The price has jumped 19 cents a gallon in two weeks.

Energy specialists predict that, as demand picks up further this
spring and summer, retail prices will surpass the high of $3.23 a
gallon set last Memorial Day weekend. That high fell short of the
inflation-adjusted record of $3.40 in today's money that was set in 1981.

On Tuesday, diesel prices rose to a record $3.60 a gallon, compared
with $2.62 a gallon last year.

For a decade, rising oil prices failed to dent global economic growth.
In the United States, consumers absorbed the higher costs because of
easy credit and rising prosperity, while in developing countries,
government subsidies helped ease the pain. The rise in energy prices
was a result of growing demand around the world.

The price of oil has quadrupled in six years, and the close Tuesday
was not far below the inflation-adjusted high set in April 1980, after
the Iranian revolution. That record, $39.50 a barrel, equals $103.76
in today's money.

As oil prices spiked last fall, low wintertime gasoline demand helped
keep prices in check. But now, experts say, the price of oil is
finally showing up at the pump.

Still, things are not quite as bad as during the 1970s and 1980s oil
shocks. In the early 1980s, at the height of the last energy crisis,
energy accounted for about 8 percent of household spending. As prices
fell and the economy became less energy-intensive, energy costs fell
under 4 percent of household spending in the early 1990s.

With the run-up in prices in recent years, economists say energy's
share of disposable income is slowly creeping up again. In December,
that figure reached 6.1 percent, the highest level since 1985. The
increase of two percentage points, amounting to $200 billion, is a
huge sum, a little less than half what Americans spend each year on
new cars and automobile parts.

"You're adding an oil shock on top of a crunch on credit and a housing
collapse," said Nigel Gault, an economist at Global Insight. "Even the
U.S. economy cannot withstand all of that at the same time."

American consumers have responded belatedly by cutting back on their
energy use. Oil demand in the United States grew by just 0.4 percent
in 2007 and is expected to be flat in 2008.

But global oil demand, the relentless driver behind higher prices, is
still expected to increase by 1.4 million barrels a day this year,
analysts estimate. That growth, from China and the Middle East, may
help keep prices up, whatever happens to the American economy.

According to the latest forecast by the Energy Department, gasoline
prices should peak near $3.40 a gallon this spring.

But many analysts consider the government's forecast conservative,
foreseeing a sharper spike as refiners come out of the seasonal
maintenance period and start producing summer-grade gasoline in March
and April.

"We've gone this high without the normal summer dynamics," said Tom
Kloza, publisher and chief oil analyst at the Oil Price Information
Service. "That's when I think we will have the big jump, of 50 cents
to 75 cents a gallon."

Mr. Kloza said he expected gasoline to peak around $3.50 to $3.75 a
gallon nationwide. Geoff Sundstrom, AAA's spokesman, echoed that view
and added that gas at $4 a gallon is possible this summer. "We've gone
from a worrying situation for gasoline to one that is quite alarming,"
Mr. Sundstrom said.

Oil prices are unlikely to drop anytime soon, analysts said. Barclays
Capital recently increased its long-term prediction, saying prices
could reach $137 a barrel in 2015, up from a previous target of $93 a
barrel.

"The remorseless move up in long-run prices has not yet fully played
out," Barclays analysts said in a note to investors.

While demand keeps growing, producers are struggling to catch up. They
are not replacing the oil they are pumping out of the ground fast
enough because of restrictions on access to fields, as well as rising
costs. Meanwhile, demand in China, India and the Middle East is
expected to push oil consumption up by more than one million barrels a
day, each year, for the next decade.

"An oil crisis is coming in the next 10 years," John B. Hess, the
chairman of the Hess Corporation, said at a recent conference held by
Cambridge Energy Research Associates. "It's not a matter of demand.
It's not a matter of supplies. It's both."
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