Oil Price Tops $100, Increasing Concerns

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Higher costs feared for gas, other goods

The price of crude oil closed above $100 a barrel for the first time
yesterday, raising the specter of higher prices for gasoline, food,
plastics and an array of other goods.

Crude oil for March delivery jumped $4.51, or 4.7 percent, to close at $100.01 on the New York Mercantile Exchange.

"My initial reaction is, ‘Yikes!’ " said Charles Langley, who
tracks energy prices at San Diego’s Utility Consumers’ Action Network,
or UCAN. "This looks like the kind of super spike that some people
started predicting about five years ago and a lot of people thought
would never happen."

Bruce Zaro, chief technical strategist at Delta Global Advisors in Huntington Beach, doubts that the spike is over.

"Rising above the triple digits is a major psychological
benchmark," he said. "If things continue to line up, I could see the
price rising to $110 or $112."

A sustained rise in the price of oil can affect broad areas of
the economy. Food can get more expensive, not only through increased
transportation costs but also higher costs for petroleum-based animal
feed and fertilizer. Clothing prices could rise as the cost of
petroleum-based polyester goes up. Plastics, a component in everything
from toys to computers, are also petroleum-based.

"Everything we make and eat is very oil-dependent," Langley said. "When the price of oil goes up, everything goes up."

The gas pump will be the first place where consumers can expect
to see higher prices. In a bad omen for drivers, gasoline futures
yesterday rose nearly as fast as oil, with gasoline for March delivery
jumping 4.4 percent to a record $2.60 a gallon.

Gas prices in San Diego rose 5 cents last week to $3.10, below the all-time high of $3.50 reached in May, according to AAA.

The national average for a gallon of regular gas rose 1.8 cents to $3.03 a gallon yesterday, AAA reported.

Analysts suggested that much of the oil price spike had to do
with growing speculation that the Organization of Petroleum Exporting
Countries will vote next month to cut oil production. A cut could drive
up prices further.

One reason OPEC could be planning to make such a move is that
it expects demand to soften, which would reduce the price of oil.
Demand typically softens in springtime, thanks to lower use of heating
oil. OPEC expects demand to be lower than normal this year, especially
if the United States enters a recession.

With the combined effects of an economic slowdown and a
springtime thaw, OPEC President Chakib Khelil projects that demand for
oil will drop 1.8 million barrels a day during the second quarter,
justifying a cut in production.

For that reason, some analysts said the latest jump in oil prices doesn’t make sense.

"I find it somewhat puzzling that the oil price rose so high,"
said Brian Hicks, a portfolio manager specializing in natural-resource
investments at U.S. Global Investors in San Antonio. "I’m wondering
what’s changed so dramatically to cause oil to spike."

Other possible reasons for the oil spike range from an
explosion at a small U.S. refinery to recent threats by Venezuelan
President Hugo Chávez to cut oil shipments to the United States. But
Chávez rescinded his threat Sunday, and the Alon USA Energy refinery in
Big Spring, Texas, is too small to have a broad effect.

"From all the reports I’m seeing, it looks like this was less
about supply and demand and much more about emotional issues," said Joe
Sparano, president of the Western States Petroleum Association in

Judy Dugan, who tracks energy issues for the Foundation for
Taxpayer and Consumer Rights in Santa Monica, blamed the price jump on

"This makes no sense for anyone but speculators," she said.
"There’s no shortage of oil, demand is flat, and the only people who
are going to profit from this are Wall Street hedge funds and the oil

Other analysts say that after being whipsawed by volatile stock
prices on Wall Street and the collapse of the U.S. housing market,
investors are putting their money into commodities.

Besides oil, the prices of other commodities have been rising,
including gold, platinum, silver and copper. At the same time, the U.S.
dollar is falling. The dollar yesterday hit a two-week low against the
euro. A weak dollar tends to push the price of oil higher.

"We’re going to continue to see a weak dollar through 2008,
which will support price rises across the board for commodities," Hicks

Regardless of the reasons for yesterday’s price spike, most
economists and analysts think the price of oil is fated to stay high,
thanks to increasing demand from China and India.

Economists are split over what a sustained rise in the price of oil would mean for the economy.

"It may be improvement in the economy that’s driving oil prices
up," said University of California San Diego economist James Hamilton,
who specializes in energy issues. "That’s been part of the global story
for the past couple years. Economic growth drives the price of oil
rather than the other way around."

If oil prices rise too high and too fast, it may result in a bout of inflation.

"As long as we were afraid that we were going into a period of
negative economic growth, inflation was on a back burner," Hamilton
said. "But the effects of these price rises could well create economic
problems six to nine months down the road."

Bloomberg News contributed to this report.
Contact the author Dean Calbreath at: (619) 293-1891; [email protected]

Consumer Watchdog
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