Crude oil's rally above US$30 a barrel for the first time in 15 months will raise costs for importers and consumers without derailing a US economic recovery, economists and analysts said.
Speculation that the US is preparing to invade Iraq and topple President Saddam Hussein has helped spur a 17 percent rally in oil over the past two months. The US, the biggest energy consumer, imports about 55 percent of its oil.
"Prices will have to rise to the US$35 to US$38 range before there's an impact on the fledgling recovery," said Vincent Boberski, a senior economist at RBC Dain Rauscher Inc. in Chicago.
Oil companies don't expect prices to stay above US$30 for long, said Eugene X. Hodge, a senior investment officer at John Hancock Mutual Life Insurance Co who co-manages a US$4 billion oil and gas bond portfolio. "It's a temporary blip due to the political situation."
Crude oil for September delivery rose US$0.27, or 0.9 percent, to US$30.11 a barrel on the New York Mercantile Exchange.
It was the highest closing price for a contract closest to expiration since Feb. 13, 2001.
The rally "can't help the economy," Hodge said. "It's more money out of peoples' pockets for gasoline."
Higher oil prices can accelerate the rate of inflation, though the overall rate is too low right now to worry economists.
The personal consumption expenditures price index, the Federal Reserve's preferred inflation gauge, rose at a 2.5 percent annual rate in the second quarter, up from a 1.1 percent rate of increase during the first three months of the year. Excluding food and energy costs, the index rose at a 1.7 percent rate.
"The Fed has made it clear that it's more concerned about growth rather than inflation," said RBC's Boberski. "Outside of energy, prices are behaving very well."
Oil's rise above US$30 a barrel may encourage more people to associate oil prices with slow economic growth, said Aaron Brady, an analyst at Energy Security Analysis Inc in Wakefield, Massachusetts.
"This is the magic number when people start to get worried about the economy," Brady said. "Weak economies are often precipitated by high oil prices."
The increase in oil prices of about US$9 a barrel this year will take time to be reflected in the economy, said Gemma Wright, director of research at Barclays Capital Inc in New York.
"We use a rule that for every US$10 jump in the oil price it slows the economy by about 0.3 percentage point of GDP annual growth, with a six-to-twelve-month lag," she said.
The US gross domestic product expanded at a 1.1 percent annual pace in the second three months of the year, down from a 5 percent growth rate in the first quarter, according to the Commerce Department. Wright expects the US economy to grow 3 percent this year and 4.5 percent in 2003.
Oil prices peaked at a 10-year high of US$37.80 a barrel in September 2000, prompting President Bill Clinton to order the release of 30 million barrels of oil from the nation's Strategic Petroleum Reserve to replenish refiners' supply. That peak in oil prices came six months before the US slipped into a recession.
The Bush administration said yesterday it has no plans now to release oil from the reserve.
Service station prices for regular gasoline, the most visible oil price to US consumers, averaged US$1.392 a gallon yesterday, US$0.035 lower than a year earlier, according to the Energy Department. Pump prices have climbed 27 percent this year.
"Once gasoline gets to between US$1.50 and US$2, then the consumer starts to feel it and cuts back on usage," said Alan Wright, vice president of supply distribution for Knoxville, Tennessee-based Pilot Travel Centers LLC. "You'll see it with the trucking companies. They'll start adding on a surcharge" to cover higher diesel costs, said Wright, whose company owns 232 travel centers and sells 2.8 billion gallons of diesel and gasoline a year.
Concern that there might be a war with Iraq is adding between US$3 and US$5 to current oil prices, John Hancock's Hodge said.
"Every day you pick up a paper and wonder if we are going to invade Iraq so it's no wonder that the traders have pushed prices up," Hodge said.
High oil prices may stunt a recovery in the world economy because the Organization of Petroleum Exporting Countries may not act fast enough to add extra oil to stem the rally, Mike Wittner, a principal oil-price analyst for the International Energy Agency, said in an interview.
The Paris-based IEA was established in 1974 to represent the interests of the US and other industrialized countries following an oil embargo by Arab oil-producing nations the previous year.
OPEC meets next on Sept. 19 in Osaka, Japan.
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