Crude prices hit highest since Gulf War; consumers will soon pay

Thursday, November 18th 1999, 12:00 am
By: News On 6

A 9-month-long surge in prices brought crude oil to its highest level since the Persian Gulf War on Thursday, a fact that could soon hit consumers hard with steeper gasoline prices,
surcharges on plane tickets and higher costs on a wide range of products.

"Just in time for Christmas. That's going to be shocking for people," said John Kilduff, senior vice president of energy risk management for Fimat USA, a New York futures brokerage firm.

Oil rose as high as $26.80 a barrel on the New York Mercantile Exchange, the costliest since January 1991 when the war drove it to $32. Profit-taking ultimately pushed it back to $25.80 by day's end, below Wednesday's close of $26.60.

Oil has more than doubled this year, driving gasoline prices up about 25 percent to an average of about $1.25.

But, so far these increases have been but a small bump in the way of the steamroller U.S. economy. Analysts fear that's likely to
change soon.

A price of $30 a barrel, unthinkable when it bottomed out at $11.26 last February, now is possible by year's end.

"At around $30 a barrel, you're probably looking at a nationwide average of at least $1.50 a gallon for gas, higher in places like New York and high-tax states, and probably over $2 a gallon in California," said Kilduff.

While analysts have been downplaying the significance of oil's rise so far, there's concern that continued increases could drive up the overall inflation rate. That could perhaps prompt another interest rate increase by the Federal Reserve Board, which raised rates this week. Higher rates could put a damper on overall economic growth.

Still, the unease is far from panic. No one is forecasting oil will even approach the all-time high of $40.42 a barrel of Oct. 11, 1990, just after Iraq's invasion of Kuwait. And economists note that, in current dollars, prices aren't really the equivalent of prices from the Gulf War of nine years ago or the oil crunch and
recession of two decades ago.

"There's no cause for alarm," said Leo Drollas, chief economist for the Center for Global Energy Studies, a London think tank. "But there's cause for concern. There's a long catalog of repercussions from this.

"We've been blessed by low inflation, which has helped the Asian recovery and kept the U.S. economy booming. And inflation is
edging up, for other reasons as well. This is just giving it a kick when it's not needed," he said.

Oil's phenomenal price runup took off last March when the Organization of Petroleum Exporting Countries and other allies --
disconcerted by a world oil surplus and plummeting prices -- cut daily production by 2.1 million barrels, or 2.6 percent of the
global supply.

To the surprise of many, OPEC has largely adhered to the lower production levels and is expected to extend them past their
scheduled expiration in March.

With crude oil inventories near a two-year low and still falling, and the arrival of colder weather that increases demand, analysts say there's no end in sight to oil's rise.

Americans have grumbled about higher gas prices, but high demand signals they have largely shrugged them off. After all, Europeans
pay two or three times as much at the pump.

But Kilduff says the latest spike will be more noticeable in the coming weeks as gas retailers, airlines and shippers pass along
their higher costs to consumers.

"We'll probably have a good six months or so of inflated energy prices that we'll have to deal with," he said.

Experts say that while OPEC's strategy is paying off in the short run, it will hurt demand over the long run because soaring prices have drawn other producers into the market to fill the gap.

That could ultimately push prices back down.