Fuel prices may remain at historically lofty levels throughout 2008
Wednesday, 26 December 2007
NEW YORK, Dec 25(Agencies): Oil's run to nearly US$100 a barrel this year jacked up the cost of travel, clothing, beauty products and milk, and many analysts think fuel prices will remain at historically lofty levels throughout 2008.
But record energy prices could sow the seeds of their own destruction. Along with the housing crisis, they are contributing to an economic slowdown that is sapping the United States' energy appetite just as oil producers ramp up production.
Oil futures drifted higher in light holiday trading Monday after predictions of a drop in crude inventories raised new supply concerns.
With little other news to motivate buying or selling, investors focused on forecasts by analysts including Addison Armstrong, director of exchange traded markets at TFS Energy Futures LLC, who predicted crude supplies fell by 1.5 million barrels last week. Tim Evans, an analyst at Citigroup Inc., predicted that crude supplies fell by 2 million to 3 million barrels.
The Energy Department's Energy Information Administration reports oil inventories on Thursday this week, a day late due to Christmas.
Light, sweet crude for February delivery rose 82 cents to settle at $94.13 a barrel on the New York Mercantile Exchange after falling as low as $92.50 earlier. Prices rose more than $2 on Friday after the government reported consumer spending jumped more than expected in November, raising hopes that the economy will weather the crisis roiling credit markets and that demand for oil and gasoline will strengthen.
Rising stocks also sent oil prices higher Monday; energy investors often view the stock market as a barometer of economic sentiment. But analysts cautioned against reading too much into price moves on light trading days around the holidays, noting that prices can be distorted when volume is low. The Nymex was closing an hour earlier, at 1:30 EST, and markets in the U.S. and many other countries will be closed Tuesday for Christmas.
"The cure for high prices is more high prices," said Tim Evans, an analyst at Citigroup Inc, in New York.
That doesn't mean oil will plummet - unless there's a severe recession, said Evans, who expects prices to hover near $70 a barrel. In the face of such forecasts, OPEC could decide to cut production, as it did last year, to keep prices from falling too low.
Other factors will also keep a relatively high floor underneath prices. Demand is expanding in China, India and the Middle East. And political upheaval in oil-producing countries such as Iran, Iraq and Nigeria have sparked worries about possible supply disruptions. These concerns have prompted banks and hedge funds to make big bets on oil - investments that put further upward pressure on prices.
Several analysts have boosted their average oil price forecasts for 2008 - US$75 a barrel is a common prediction. And many expect tight domestic refining capacity to push gasoline prices higher in the spring, possibly threatening last May's record of $3.227 a gallon.
But there are already signs that the gargantuan 6-year, 270 per cent run-up in crude prices is having an impact on consumers and businesses, and that could curb demand growth.
"I am being a little bit more judicious about where we go and when we go," said Frank Ban, of Bensalem, Pa., loading his Chrysler at a Philadelphia area Wal-Mart one recent morning. "If I cut back on my heating use any more, my pipes would freeze."
A typical family spends 3.8 per cent of its income fueling a single vehicle, up from 1.9 per cent in 2002, according to the Oil Price Information Service. That's not a huge percentage, but combined with increases in prices of other energy-dependent goods and services, a family's income takes some significant hits.
Indeed, prices of consumer goods such as meat and milk are also higher these days, in part due to skyrocketing energy costs that are taxing American farmers. The cost of corn, used to feed cattle, is rising due to demand from the ethanol industry. Transportation costs are rising, as is the cost of plastic bottles and rubber tires, which are made from crude.
"Oh, yeah, you see that in groceries," Ban said.
At many companies, particularly in the transportation sector, programs to offset high energy prices have gone from side project to central business strategy.
In addition to raising fares, AMR Corp., (NYSE:AMR) the parent of American Airlines is using tractors to tow aircraft from gates to hangers, rather then relying on the planes' own engines, as a way to cut down on jet-fuel consumption.
Nagle Cos., a Walbridge, Ohio-based trucking company, has renegotiated financing with lenders to free up cash and keep its 70 rigs rolling as diesel price soar, said CEO Ed Nagle.
Even Just Born, a candy maker in Bethlehem, Pa., is raising prices of its Peeps, Hot Tamales and TeeneeBeanees to compensate for rising energy costs. Just Born is also working to ensure machines in its plants are running at their most efficient levels and encouraging employees to turn machines and lights off when they're not in use.
The rising cost of petrochemicals - to say nothing of shipping - is driving up the price of all kinds of consumer goods. For example, lipstick and other makeup derived from oil are up seven per cent in price over the past 12 months, according to Marshal Cohen, chief analyst at NPD Group in New York. Clothing prices have risen three to five per cent over the same period, Cohen said, with synthetic-based apparel rising fastest.
Manufacturers have found that small changes can lead to big energy savings.
Gary Jones, director of environmental, health and safety at the Printing Industries of America, said commercial printers are pinching pennies by shutting off compressed air machines when not in use, installing motion-sensors for lights and turning computers off at night.
But record energy prices could sow the seeds of their own destruction. Along with the housing crisis, they are contributing to an economic slowdown that is sapping the United States' energy appetite just as oil producers ramp up production.
Oil futures drifted higher in light holiday trading Monday after predictions of a drop in crude inventories raised new supply concerns.
With little other news to motivate buying or selling, investors focused on forecasts by analysts including Addison Armstrong, director of exchange traded markets at TFS Energy Futures LLC, who predicted crude supplies fell by 1.5 million barrels last week. Tim Evans, an analyst at Citigroup Inc., predicted that crude supplies fell by 2 million to 3 million barrels.
The Energy Department's Energy Information Administration reports oil inventories on Thursday this week, a day late due to Christmas.
Light, sweet crude for February delivery rose 82 cents to settle at $94.13 a barrel on the New York Mercantile Exchange after falling as low as $92.50 earlier. Prices rose more than $2 on Friday after the government reported consumer spending jumped more than expected in November, raising hopes that the economy will weather the crisis roiling credit markets and that demand for oil and gasoline will strengthen.
Rising stocks also sent oil prices higher Monday; energy investors often view the stock market as a barometer of economic sentiment. But analysts cautioned against reading too much into price moves on light trading days around the holidays, noting that prices can be distorted when volume is low. The Nymex was closing an hour earlier, at 1:30 EST, and markets in the U.S. and many other countries will be closed Tuesday for Christmas.
"The cure for high prices is more high prices," said Tim Evans, an analyst at Citigroup Inc, in New York.
That doesn't mean oil will plummet - unless there's a severe recession, said Evans, who expects prices to hover near $70 a barrel. In the face of such forecasts, OPEC could decide to cut production, as it did last year, to keep prices from falling too low.
Other factors will also keep a relatively high floor underneath prices. Demand is expanding in China, India and the Middle East. And political upheaval in oil-producing countries such as Iran, Iraq and Nigeria have sparked worries about possible supply disruptions. These concerns have prompted banks and hedge funds to make big bets on oil - investments that put further upward pressure on prices.
Several analysts have boosted their average oil price forecasts for 2008 - US$75 a barrel is a common prediction. And many expect tight domestic refining capacity to push gasoline prices higher in the spring, possibly threatening last May's record of $3.227 a gallon.
But there are already signs that the gargantuan 6-year, 270 per cent run-up in crude prices is having an impact on consumers and businesses, and that could curb demand growth.
"I am being a little bit more judicious about where we go and when we go," said Frank Ban, of Bensalem, Pa., loading his Chrysler at a Philadelphia area Wal-Mart one recent morning. "If I cut back on my heating use any more, my pipes would freeze."
A typical family spends 3.8 per cent of its income fueling a single vehicle, up from 1.9 per cent in 2002, according to the Oil Price Information Service. That's not a huge percentage, but combined with increases in prices of other energy-dependent goods and services, a family's income takes some significant hits.
Indeed, prices of consumer goods such as meat and milk are also higher these days, in part due to skyrocketing energy costs that are taxing American farmers. The cost of corn, used to feed cattle, is rising due to demand from the ethanol industry. Transportation costs are rising, as is the cost of plastic bottles and rubber tires, which are made from crude.
"Oh, yeah, you see that in groceries," Ban said.
At many companies, particularly in the transportation sector, programs to offset high energy prices have gone from side project to central business strategy.
In addition to raising fares, AMR Corp., (NYSE:AMR) the parent of American Airlines is using tractors to tow aircraft from gates to hangers, rather then relying on the planes' own engines, as a way to cut down on jet-fuel consumption.
Nagle Cos., a Walbridge, Ohio-based trucking company, has renegotiated financing with lenders to free up cash and keep its 70 rigs rolling as diesel price soar, said CEO Ed Nagle.
Even Just Born, a candy maker in Bethlehem, Pa., is raising prices of its Peeps, Hot Tamales and TeeneeBeanees to compensate for rising energy costs. Just Born is also working to ensure machines in its plants are running at their most efficient levels and encouraging employees to turn machines and lights off when they're not in use.
The rising cost of petrochemicals - to say nothing of shipping - is driving up the price of all kinds of consumer goods. For example, lipstick and other makeup derived from oil are up seven per cent in price over the past 12 months, according to Marshal Cohen, chief analyst at NPD Group in New York. Clothing prices have risen three to five per cent over the same period, Cohen said, with synthetic-based apparel rising fastest.
Manufacturers have found that small changes can lead to big energy savings.
Gary Jones, director of environmental, health and safety at the Printing Industries of America, said commercial printers are pinching pennies by shutting off compressed air machines when not in use, installing motion-sensors for lights and turning computers off at night.