Posted on Wed, Nov. 07, 2007
last updated: November 07, 2007 07:13:16 PM
WASHINGTON — Oil prices raced toward $100 a barrel Wednesday, hitting $98.62 on the New York Mercantile Exchange before falling back to $96.37 at the close of trading.
Such heights were unthinkable last Jan. 18, when oil prices hit a yearly low of $50.48. One impact of the zoom up: a sell-off on Wall Street, as investors — already worried by weak earnings at General Motors — feared that high oil prices could hurt an already slowing economy. The Dow Jones Industrial Average on Wednesday fell 360.92 points, 2.64 percent, to 13,300.02, and the S&P 500 fell 44.65 points, 2.94 percent, to 1475.62.
Many financial analysts expect prices to break $100 a barrel before year's end, if not sooner. Here are some questions about oil's price rise.
Q: Why hasn't oil already hit $100?
A: Prices might have broken that barrier Wednesday if the Energy Information Administration, the Department of Energy's research arm, hadn't reported that oil stockpiles fell less than expected last week. The report meant that there's more oil available than traders thought.
Q: Why do traders care about these stockpiles?
A: With global oil demand soaring, lower stockpiles mean a greater possibility that oil will be in short supply in the future. Traders are willing to pay more if they think a shortage is likely. Bigger stockpiles mean there's less chance of a shortage, so traders aren't willing to pay as much.
Q: Is oil in short supply?
A: No. In fact, the world's ability to produce more oil than it needs is better now than it was after Hurricanes Katrina and Rita in 2005, which spotlighted how tight global oil production had become.
Q: Then why are prices going up?
A: A number of reasons. Some the EIA mentioned Wednesday: strong global economic growth compared with the relatively moderate growth of oil production in countries that aren't members of OPEC, lower production by some OPEC members, bottlenecks in worldwide refining ability and concerns that conflicts involving oil-producing countries or supply routes could threaten supplies.
Q: Are speculators running up prices?
A: Probably, but by how much is just a guess. Much of the trade in oil is done by companies or groups that have no plans to take delivery of the oil. They've invested tens of billions of dollars buying contracts for future oil deliveries that they hope to sell at a profit to someone else. Much of this trading in contracts is unregulated, so it's hard to know who precisely is buying and how much they're investing. Some critics think this allows for market manipulation.
Q: How does this affect oil companies such as ExxonMobil and Chevron?
A: Not as much as you might think. Most have annual contracts with oil producers such as Saudi Arabia, Mexico and Venezuela, and the price under such contracts doesn't fluctuate wildly. However, their costs might rise, because the contracts allow the price to be adjusted monthly.
Q: How do today's high prices differ from the oil shocks of the 1970s and '80s?
A: Those crises were due to supply shortages caused by oil producers that withheld oil from the market because of the U.S.'s Middle East policy. Today's prices, oil historian Daniel Yergin said, are the result of a relatively gradual increase in demand as developing nations' economies grow, need more oil and strain the supply.
Q: Will these high prices hurt the U.S. economy?
A: They haven't so far. The U.S. economy uses less than half the energy it did in the 1970s to produce a dollar of economic output. The Census Bureau's most recent survey of consumer expenditures showed that Americans spent about 4.3 percent of their wages on gasoline in 2005, up from 3 percent in 2002 but hardly a bank breaker.
Q: So high oil prices don't matter to the economy?
A: Yes, they do. Higher energy prices drive up the cost of many things, from airline tickets to home heating oil to food. They reduce what people can spend on other things. Since consumption drives two-thirds of U.S. economic activity, Wall Street frets that high energy prices might lead to recession.
McClatchy Newspapers 2007