Oil Hits $70 a Barrel for First Time

By James R. Healey

The price of oil settled above $70 a barrel at the close of commodities trading in New York on Monday — the first time that’s ever happened.

The hope of speculators, and the fear of consumers, is that oil prices now have no ceiling and could hit the $100-a-barrel numbers kicked around the past few months by some analysts, and sharply derided as fantastic by others.

Monday’s price was $70.40 for a barrel of benchmark light, sweet crude oil for May delivery. That’s up $1.08 from Thursday. (The commodities exchange was closed on Good Friday.) It’s 59 cents more than the previous peak closing price of $69.81 hit Aug. 30.

Fear of war with oil-exporter Iran over its nuclear plans was widely cited Monday as being behind the jump in oil prices. Iran said it will continue plans to enrich uranium for commercial power generators. The U.S. and other countries fear that Iran will use uranium for atomic weapons.

The Monday high is not a record if inflation is taken into account. That peak is the equivalent of $86.99 in today’s dollars, set when oil was $38.85 a barrel in January 1981, according to the U.S. Energy Information Administration.

"The question now is, ‘Where does it end?’" says Tom Kloza, analyst at Oil Price Information Service.

Gasoline is made from oil, and the price of oil accounts for roughly 60% of the price of gasoline. But the two aren’t in lock-step. Wholesale gasoline prices — harbinger of what motorists pay at the pump — already are more than oil. Wholesale gasoline was the equivalent of $91 to $96 a barrel Monday, Kloza says.

"There’s a fascination with crude oil, but people don’t burn crude. They burn gasoline and diesel," Kloza says. He calculates that motorists are spending at least $500 million more a day on gas than they were a year ago, $10 million more on diesel.

"There’s not as much cushion to offset the blow" of higher energy prices, says National City chief economist Richard DeKaser. He says rising interest rates are eliminating mortgage refinancing as a major source of cash, and big tax cuts aren’t foreseen. Consumer spending is more than two-thirds of U.S. economic activity. The more that people pay for fuel, the less they can spend to keep the economy growing.

Kloza forecasts a peak nationwide average price just short of $3 by May 6 and as much as $1 less by Thanksgiving as demand slows. EIA reported a nationwide average $2.783 Monday, up 10 cents in a week and up 54.6 cents in a year.

Stock prices fell Monday on worries that high-priced energy could slow U.S. economic growth.

Contributing: Barbara Hagenbaugh

(c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc.