Oil Nicks $100 a Barrel
By Thomas Content, Milwaukee Journal Sentinel
Jan. 3–The price of oil touched $100 a barrel on the first business day of 2008 Wednesday, renewing concerns about whether the U.S. economy will fall into recession amid falling housing prices, a tightening credit crunch, high energy prices and a slowdown in the manufacturing sector.
A dim outlook from purchasing managers at U.S. manufacturers and Wednesday’s $3.64-a-barrel jump in oil prices pushed stocks down on the first trading day of the year.
The Dow Jones industrial average fell 220.86 points, or 1.7 percent, while the Nasdaq Composite Index slipped 42.65, or 1.6 percent, to 2609.63 and the Standard & Poor’s 500 index fell 21.20, or 1.4 percent, to 1447.16.
Oil has been within striking distance of $100 a barrel for months. Analysts attributed the oil price rise to unrest in Nigeria, Africa’s largest oil-producing country, and forecasts of low oil reserves in the United States.
Also hitting new highs: futures prices of heating oil and gasoline, possible indicators of more pain at the pump in the months ahead. In Milwaukee, the price of regular unleaded gasoline stood at $3.03 a gallon Wednesday, up 70 cents a gallon, or 30 percent from this time last year.
On the New York Mercantile Exchange, where futures contracts of oil and other commodities are traded, the $100 milestone was hit for less than one minute, shortly after 11 a.m. Milwaukee time. By the time trading ended Wednesday afternoon, oil was up $3.64 at $99.62.
Though brief, the $100 milestone was significant, some energy observers said.
“This is an important psychological number,” said Rick Mueller, an analyst with Energy Security Analysis Inc. in Wakefield, Mass. “Everyone has been expecting this since early December.”
“These prices are here to stay,” said Emil Pena, executive director of the Energy and Environmental Systems Institute at Rice University in Houston. “We have to come to grips with these high prices. I hope this will lead to us becoming more efficient and increase our energy education.”
Oil prices have been rising, from less than $17 a barrel in late 2001, as concerns mount about the industry’s ability to meet ever-increasing demand for petroleum, particularly in China and India.
China has more than doubled oil use in recent years and has soaked up most of the world’s spare production capacity amid supply cuts in Nigeria, Iraq and Venezuela.
Other economists said they can’t be sure if oil prices will remain at or above $99 a barrel for a prolonged period.
“If we spend a few days at $100 and then drop back into the low $90s, that’s one thing,” said Scott Hoyt, director of consumer economics at Moody’s Economy.com. “If oil persists near $100 a barrel into the summer driving season, which would likely mean gasoline prices in the vicinity of $4 a gallon on a national average basis, that’s a whole different and much more serious situation.”
Economists at Moody’s Economy.com say there’s a 50-50 chance that the U.S. economy will fall into recession this year. High oil prices, if they persist, would boost those odds, he said.
But other market and economy observers say the economy is more resistant to higher energy prices because industries and homes are more energy-efficient than they were decades ago, when oil prices spiked.
A key concern is the health of the manufacturing sector, which contracted in December, according to an index compiled by the Institute for Supply Management. That index finished 2007 with its slowest rate of growth since 2001, the last time the U.S. economy experienced a recession.
“A recession is still not a foregone conclusion,” said economist Clare Zempel of Zempel Strategic in Fox Point.
Even with the housing market’s woes, the economy grew at a 3 percent clip in the 12 months that ended in September, he said. Interest rates remain low, and the Federal Reserve is lowering rates further to ward off concerns that banks will be hesitant to lend as they examine the financial toll of the credit crunch.
Though its percentage drop was modest, the Dow Jones industrial average’s fall Tuesday was its biggest decrease to start a new year of market trading.
In Wisconsin Wednesday, the stock prices of 51 state companies fell, while only 14 rose. Three firms lost at least 5 percent, including Marten Transport, down by 5.6 percent to $13.17. TomoTherapy Inc. fell 5.4 percent to $18.50, while Assisted Living Concepts of Menomonee Falls fell 5.2 percent to $7.11. Eight manufacturing companies, including Ladish Co. Inc., Johnson Controls Inc. and Wausau Paper Corp. fell by at least 3 percent.
Airline stocks dropped, reflecting concerns from investors about the effects of higher oil prices on jet fuel. Among those falling was Northwest Airlines Corp., the No. 2 carrier at Milwaukee’s Mitchell International Airport, which closed at $13.31, down $1.20, or 8.3 percent.
Oak Creek-based Midwest Air Group Inc., which operates Midwest Airlines and Midwest Connect, dropped less steeply. Midwest Air closed at $14.63, down 17 cents, or 1.1 percent.
Midwest Air’s stock price was supported by the company’s pending sale, at $17 a share, to TPG Capital and Northwest Airlines. The transaction is still being reviewed by antitrust regulators. Northwest would own a 47 percent non-management stake in Midwest.
High oil prices have “already done quite a bit to the economy,” said Michael Swanson, senior economist at Wells Fargo Economics in Minneapolis. “We have seen miles driven in this country basically stagnate since September 2005 thanks to high-priced oil, and that’s the main and most reasonable response: People don’t drive as much, and they try to get cars that get better mileage.”
People will spend more on high energy costs and will spend less on other items if energy prices remain high, he said.
Oil prices passed the previous all-time inflation-adjusted record on Oct. 15, Bloomberg News reported. Measured in today’s dollars, oil in 1981 rose as high as $84.73 after a decade of Middle East instability including the Arab-Israeli war in 1973, the Iranian revolution in 1979 and the Iran-Iraq war that began in 1980.
The $100 milestone came less than a year after the U.S. Government Accountability Office recommended that the U.S. Department of Energy begin to develop a strategy to respond to issues relating to “peak oil,” the point at which production of oil will no longer grow and demand for oil could start to outstrip supplies.
Various studies show the world’s oil production will peak between now and 2040, though the exact timing is unclear, the GAO report found. “An imminent peak and sharp decline in oil production could have severe consequences, including a worldwide recession,” the agency said.
Tom Daykin of the Journal Sentinel staff, Bloomberg News and The Associated Press contributed to this report.
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