Wednesday, Mar 24, 2004
Average prices at the US petrol pump hit an all-time high yesterday - but prices will continue to rise, oil experts say.
The average price for regular petrol was Dollars 1.738 (Euros 1.4, Pounds 1) a gallon, slightly above the record hit in September, according to the American Automobile Association.
The steady rise in petrol prices comes as supplies remain unseasonably tight and demand is high ahead of the summer, traditionally the peak period for fuel sales in the US.
A rise in oil and gas prices has been a modest drag on the otherwise strong US economy, but so far US consumers have not reined in spending or driving despite the rising prices. Energy analysts say petrol prices are almost certain to climb to Dollars 2 a gallon on average by summer, which will test consumer resilience.
"Interestingly, the record-high gas prices are happening as demand is continuing to rise. So far, it hasn't had that negative an effect on the economy," said Phil Flynn, energy analyst at Aleron. "This summer, we're going to test the consumer's patience, when the national average rises above Dollars 2 a gallon."
The rising petrol pump prices come as oil prices eased slightly after crossing above Dollars 38 a barrel, the highest levels in 13 years. At midday yesterday, the light sweet crude futures on the New York Mercantile Exchange were fetching Dollars 37.15 a barrel.
A continued rise in oil prices is viewed as inevitable among many on Wall Street. Demand has steadily climbed in the US, while the burgeoning economies of China and India have been ramping up their oil use as well.
Meanwhile, production growth in non-Organisation of Petroleum Exporting Countries has been slowing, which is exacerbating the lean inventories among US companies.
Traditionally, US companies have built up their inventories during the first half of the year, then driven them down during the second half when consumption runs high. At the same time, inventories are at their lowest levels since the 1970s.
This supply-demand scenario has given Opec greater leverage in pricing matters. The oil cartel is set to meet next week about whether to proceed with a planned production cut of 1m barrels a day to 23m; some Opec members are balking at a time when prices are historically high.
Regardless of the Opec decision, energy experts say crude oil prices will continue to rise.
"The market is going to make a run at 40 bucks, that I can guarantee you," said Mike Driscoll, energy trader at Bear Stearns.
Indeed, the days of the ceiling on oil prices hovering at about Dollars 30 a barrel may be history.
The old thinking used to be that if crude rose above Dollars 30 a barrel, it was disastrous for the US economy. "We have to reset the benchmark - it may be Dollars 40," said Mr Flynn.
While the US economy has remained resilient in the face of rising prices, several sectors have come under strain - particularly airlines and ground-transportation companies.
The Amex Airline index has fallen more than 23 per cent since late January, in part on terrorism fears but also because many on Wall Street say higher prices are here to stay.
The US economy - and the spending habits of corporations and consumers - are likely to face a much greater challenge if prices continue to rise for the rest of the year.
By STEPHEN SCHURR
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