Oil Price Surge Could Dampen Global Recovery

A surge in oil prices sparked by saber-rattling from Iran is beginning to weigh on the global economic recovery, with potential ripple effects on consumers, corporate profits and interest rates.

Drivers already are seeing the impact at the pump, where prices have risen by an average of 12 cents per gallon in just three weeks to more than $3.50 a gallon, according to a report out this week. Crude oil prices rose for a third straight day on U.S. markets Friday, topping $103 a barrel, and remained on track for a second straight week of gains.

The cost of crude has been rising steadily since hitting a seasonal low in October, gaining upward momentum on escalating tensions with Iran after a series of moves by the U.S. and European Union to pressure Tehran to shut down a uranium enrichment program aimed at producing nuclear weapons.

The moves sparked fears among oil traders that Iran, the world's fifth-largest oil producer, may retaliate by disrupting the flow of oil through a critical Persian Gulf shipping channel.

"The Iranians have a lot at their disposal to upset this market, whether by embargoing the (European Union) or even just creating some mischief," said oil industry analyst John Kilduff. "They don't even have to block the Strait of Hormuz, they just need to sink a ship, lay some mines and be disruptive."

As Western nations bent on denying Iran access to nuclear weapons have ratcheted up the pressure, traders have been busy bidding up oil and gasoline prices. Last week, more than 350,000 gasoline contracts were open (each contract represents 1,000 barrels of oil) as hedge funds and commodity investors placed heavy bets that pump prices are heading even higher. Traders expecting prices to move higher bet some $10 billion more than those who see prices falling, the third-largest skew of all time, according to Tom Kloza, president of Oil Price Information Service.

The timing of the price spike for crude comes just as oil refiners are getting ready to switch production from blending gasoline for winter use to building inventories formulated for summer consumption. That switch typically involves temporary refinery shutdowns that have pinched supplies in the past. That could produce a larger-than-normal spike this year when the summer driving season rolls around.

Pump price jumped 0.9 percent in January alone, helping to fuel a 0.2 percent increase in the Consumer Price Index, the Labor Department reported Friday.

Higher driving costs are hitting consumers just as they're beginning to catch a break balancing their households budgets. Stronger job growth and longer hours have helped boost worker paychecks in the past six months. Household incomes will continue to benefit from a payroll tax cut and long-term jobless benefits, which Congress on Friday agreed to extend through the rest of the year.

But that economic boost could be wiped out by another surge in gasoline prices: Every added penny at the pump diverts roughly $1 billion in consumer spending from other sectors of the economy. Gas prices peaked last year in May just shy of $4 a gallon, on average, and had been falling steadily before reversing course. Last week, the average price of a gallon of regular was $3.52, according to the Energy Information Administration.

Friday's consumer price data also showed that the cost of all goods rose an unexpectedly steep 2.3 percent over the past 12 months. On top of higher gasoline prices, household budgets have also been squeezed by higher prices for food, clothing, health care and education.

“While inflation has moderated, it is still higher enough to wipe out worker earnings,” said Joel Naroff, chief economist at Naroff Economic Advisors. "Even the moderate earnings growth is still not enough to improve consumer spending power a whole lot."

Businesses also are feeling the pinch, especially heavy energy users such as airlines, shipping companies and chemical manufacturers. Many of those companies, though, have figured out how to pass along their higher costs to consumers.

A temporary spike in oil and gasoline prices would be unlikely to have a lasting impact on the U.S. economy. If worries about the standoff with Iran subside, prices should ease back fairly quickly. U.S. crude inventories are near five-year highs for this time of year. While the gathering strength in the U.S. economy could push demand higher, that will likely be offset by the widening economic slowdown in Europe.

A longer-term rise in oil prices, though, could present problems for policymakers at the Federal Reserve, as they mull their next steps in trying to keep the economic recovery on track.

The Fed last month said it plans to hold its benchmark interest rate at a record low near zero until late 2014. That pledge could be hard to keep if inflation were to begin a sustained move upward. The Fed is forecasting that inflation will rise just 1.6 percent this year, below its target of 2 percent. Fed Chairman Ben Bernanke announced that target, the first ever for the central bank, last month.

But the Fed's forecasts don't assume a sustained period of elevated oil prices. Until the standoff is resolved between Western nations and Iran, those inflation forecasts will be more difficult to make.

That standoff could take months to play out.

Last month, the U.S. imposed sanctions on foreign banks financing Iranian oil sales, and the Obama administration is deciding how widely to apply them. Congress is considering wider actions, including a ban on ships that have docked in Iran, North Korea or Syria in the last two years; and sanctioning private companies involved in Iran's oil industry.

As part of its coordinated campaign with other countries, the European Union last month imposed an embargo on Iranian oil that takes effect July 1. Since then, European countries have been making arrangements to secure other sources of supply.

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  • by Ryan Location: Havelock on Feb 19, 2012 at 06:13 AM
    You can end market speculation for Oil if the World Organization required the "Speculators" to take possession and hold their commondity for 30 days before selling... the simple act of having to take posession of that much oil physically would end the speculation. There is a direction, yet lagging, correlation that has been proven to exist between presidential popularity and the cost of fuel. While some point out that Bush and Chenney had oil investments, none have been able to point out why under a President with supposedly NO oil ties, why the cost of fuel as doubled! Also, if you reflect, there is a direct correlation between our crashing economy and the cost of fuel. When fuel cost rise, Americans loose their disposable income, thus they stop buying. No buying in a consumer based economy, what we have, equals recession. Reduce energy costs, and the economy will open back up. The current administration has no intention of easing regulations, or encouraging a fuel priced based recovery. He's bent on keeping fuel cost high in order to funnel money to the Green Energy Companies he funded with your tax dollars like Solendra that have since failed. Easy plan folks, Invest in Green, and pinch off Oil via regulation. Didn't work for him though.
  • by 40some on Feb 18, 2012 at 07:45 PM
    This also dampens Obama's chances at re-election.
  • by 40some on Feb 18, 2012 at 07:45 PM
    This also dampens Obama's chances at re-election.
  • by jeff on Feb 18, 2012 at 06:04 PM
    big surprise there.... once again more excuses to raise prices on our fuel.
  • by Anonymous on Feb 18, 2012 at 04:56 PM
    "Under George W. Bush, the price of gasoline increased from $1.60 per gallon when he took office in January, 2001 to $4.40 per gallon in July 2008, a jump of 275%. When the economy crashed, the price of gasoline decreased temporarily, in part because the economic meltdown suppressed demand. When Obama took office in January, 2009, the economy was at its low point, and as a result the price of gas was at a low point as well. As the economy improved under Obama's direction, the price of gas returned to its pre-crash baseline."
    • reply
      by Eyes Wide Open on Feb 19, 2012 at 07:33 AM in reply to
      You're an idiot. You just posted that today's gas prices are exactly where they SHOULD BE when you said, "gas returned to its pre-crash baseline". Also, if the economy was at its low point in Jan. 2009 then why did unemployment continue to rise?
  • by T Maxx Location: G-vegas on Feb 18, 2012 at 03:27 PM
    We need to explore our country for natural resources, we have plenty but under this administration don't care for the working people. But obama don't care if we have to pay 4.00 bucks for gas. We need to prepare yourselves
  • by Anonymous on Feb 18, 2012 at 07:54 AM
    Why the heck is the government not forcing these car manufacturers to make only solar energy cars? I works! I did my 6th grade project on it. For goodness sake. My opinion the government has stock in oil in the NYSE. They are in control and greedy. President Bush and Dick Chenney both have huge stock in the oil industry and market.
    • reply
      by To Anonymous on Feb 18, 2012 at 10:45 AM in reply to
      BUSH and CHENEY have stock and Barack~~tell me how he helped~~OH yeah, he didn't help BP with the oil spill, and with the pipeline for American oil. I want you to look it up and see what happened. THEN tell me how Barack is helping us.
      • reply
        by Anonymous on Feb 18, 2012 at 05:02 PM in reply to To Anonymous
        I did, the GOP was against BP paying for the damage and clean-up of the Oil Spill, after Obama insisted they pay, your guys apologized to them for having to do it. One more thing, That Keystone Pipeline is not going to lower the price of fuel in the United States.
        • reply
          by Eyes Wide Open on Feb 19, 2012 at 09:51 AM in reply to
          The GOP was NEVER against BP being forced to pay for their own mess, we were against Obama handling the money from BP to distribute himself!!! Also, the oil spill would have been minimal if not for liberal regulations forcing the drilling to occur SO far offshore, 5 miles above the ocean floor!!!
    • reply
      by Eyes Wide Open on Feb 18, 2012 at 01:25 PM in reply to
      Why don't you take your 6th grade project and start a car manufacturer, or sell your AWESOME idea to an existing manufacturer? Or better yet, why not have Obama DEMAND the oil companies give us gas for "FREE" just like birth control??? Gas prices were below $2/gallon when Obama took office, so does he have huge stock in the oil industry also?
    • reply
      by Mr. America on Feb 18, 2012 at 02:54 PM in reply to
      Are you serious? Solar energy cars,please,how about we cut holes in the floors,and run them like Fred Flintstone.Solar cars would be fine if they carried one person of maybe 80lbs.a half a mile.Put the pipe down,and join the grown people in the real world.
      • reply
        by Anonymous on Feb 19, 2012 at 07:51 AM in reply to Mr. America
        So, I guess you don't care about paying an even higher price at the pump? Oh, what will you do if the oil companies set the price at $10.00 or $20.00 per gal? Stop living in the past and try for once to think about the future, and start preparing for that.
        • reply
          by Eyes Wide Open on Feb 19, 2012 at 09:53 AM in reply to
          Ride a bicycle.
  • by Common Sense on Feb 18, 2012 at 07:35 AM
    Like most of the things you buy, oil prices are affected by supply and demand. However, oil prices are also affected by oil price futures, which are traded on the commodities futures exchange. These prices fluctuate daily, depending on what investors think the price of oil will be in the future. When traders think oil will be high, they bid it up even higher. This soon causes high gas prices.
    • reply
      by Anonymous on Feb 18, 2012 at 08:40 AM in reply to Common Sense
      That is how it is supposed to be and used to be. Now it is called GREED. And of course don't forget CONTROL. Only thing is no one will admit it.
      • reply
        by Barlow on Feb 18, 2012 at 10:46 AM in reply to Anonymous
        WRONG! It is NOT how it is supposed to be and it is NOT how it used to be. Commodity traders used to have to own, by taking possession of the commodity, they traded. No more. They set at their desks and drive up the price of oil without ever needing to see one their entire lives. They play, you pay.
        • reply
          by Eyes Wide Open on Feb 18, 2012 at 01:35 PM in reply to Barlow
          Thank you Dodd-Frank!!! Who signed that financial reform bill into law??? Oh yeah, Obama!!!! Looks like the massive liberal takeover of the financial industry had some back fires, Ha Ha!!!
  • by Anonymous on Feb 18, 2012 at 06:06 AM
    There is plenty of oil in this country if we were alowed to drill it. Off the Atlantic Coast below the ocean floor is a lot of oil. But the stupid environmentalist do not want us to do this. Sure we might will save the planet, but we will starve to death while doing it. I personally can not keep paying these high gas prices. We also need more refineries built. Oh yeah, our government does not want that either. I do not know about the rest of the citizens, but I am tired of being dependent of other countries. What happened to the USA that discovered and did things for themselves? I for one will not vote for Obama. I will vote for the republican that has america's interest at heart. I do not know if anybody remembers, but Obama always wanted to gas to increase a lot so more and more people will be dependent of the government. Well I personally think the government has too much control. The country is suppose to be run by the people not by a government.
    • reply
      by Barlow on Feb 18, 2012 at 07:07 AM in reply to
      We ship the gas we refine now to other countries so what good would more refineries do? So we can ship even more overseas? All the billions paid to the oil companies should be used for development of alternate sources of energy that have nothing to do with foreign oil. There are no more subsidies for ethanol but because our congressman are bought and paid for by big oil they get paid. The definition of insanity is doing the same thing over and over and expecting different results. We need to quit depending on fossil fuels. period. The Keystone Pipeline? It will eventually be built but provide only 5% of US oil needs at best. We need to get off the oil
      • reply
        by Anonymous on Feb 18, 2012 at 07:53 AM in reply to Barlow
        I agree in getting off of the oil, but being realistic it is not going to happen. Cost of other ways to run our cars and electricity is to expensive. Nuclear power is cheaper, but the enviornemtnalist do not like it. Electric cars are nice, but until the economy gets better people are not going to be able to afford them. If gas keeps going up the econonmy is not going to get better. Again I say we need to dig for our own oil and open new refineries and stop giving it away to other countries.
      • reply
        by Eyes Wide Open on Feb 18, 2012 at 08:42 AM in reply to Barlow
        The few oil refineries we do have are shipping gasoline out of this country as fast as possible because we are in a global economy, and they can make more money abroad than right here at home. If we had more refineries then the competition here at home would increase and we all know what happens when competition increases, we get lower prices! But with the heavy regulations no one can build anymore refineries, which is what Obama whats! Why must we keep explaining how economics work to you everyday? Oh, that's right, because you believe in Obamanomics! The Keystone Pipeline would produce about 1/3 of what the US needs, not 5%. And, the billions that are paid to oil companies should be given back to the American taxpayer!!!!!!!! We should not subsidize any industry, especially when you see the corruption with Solyndra and other "Green Energy" companies!!!!!!!!
        • reply
          by Anonymous on Feb 18, 2012 at 10:44 AM in reply to Eyes Wide Open
          Keystone is actually less than 5%.
        • reply
          by Eyes Wide Open on Feb 19, 2012 at 07:46 AM in reply to Eyes Wide Open
          My bad, I was misinformed from watching MSNBC. Keystone would only produce about 1.3 million of our nearly 20 million barrels needed per day.
    • reply
      by Eyes Wide Open on Feb 18, 2012 at 08:35 AM in reply to
      Absolutely RIGHT!
  • by Chuck Location: Greenville on Feb 18, 2012 at 05:53 AM
    Same old problem exists in Greenville. I bought Gas friday at Hess At Bell Fork @$3.75 per gallon. 10 Minutes later saw the same gas at hess for $3.68 a gallon on 10th street. Same Company ,Same gas. This really pees me off & Makes me very angry. .Hess needs to fix the pricing problem in Greenville.This is just mot fair & not right. Williams family just does not get it!! Customer should boycott the hess stations until they get the pricing problem fixed. No problem,because i am now a Ex-Hess customer.
    • reply
      by Anonymous on Feb 18, 2012 at 06:11 AM in reply to Chuck
      They raise the prices when the fuel trucks put gas in the tanks. If the fuel truck has not gotten there yet then their gas prices will be lower.
      • reply
        by the one percent on Feb 18, 2012 at 07:51 AM in reply to
        I am so sick of the price of gas...the price of oil is way down but.....gas is up! I think the rich just get richer!!!
    • reply
      by Common Sense on Feb 18, 2012 at 07:45 AM in reply to Chuck
      I would like to know why it took a century for oil to reach 40 dollars a barrel and only a couple of years to reach 100 dollars a barrel? Wake up America its time for a change before its to late, why do we cater to these Clowns? Alternate Fuels must be our future.
    • reply
      by Eyes Wide Open on Feb 18, 2012 at 08:45 AM in reply to Chuck
      You can get better mileage buying gas from places other than Hess. I buy gas from the BP or Amoco. If I put gas from Hess or Sheetz in my boat I ALWAYS have fuel problems!
      • reply
        by Anonymous on Feb 18, 2012 at 10:45 AM in reply to Eyes Wide Open
        Don't put it in your boat....duhhhh.
        • reply
          by Eyes Wide Open on Feb 19, 2012 at 09:55 AM in reply to
          I don't dumby!
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