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Price of oil nears $60 per barrel

Filling up at the pump could cost more within a week as the price of oil on Monday neared $60 a barrel.

By wire services
Published June 21, 2005

Prices were driven by soaring demand that has strained the ability of the Organization of Petroleum Exporting Countries and refiners to keep pace. In response, the OPEC president said the group will consider raising its output ceiling by half a million barrels as early as this week.

OPEC raised its output target by that amount just last week. But the move appeared to have little impact on prices, which have risen by almost $12 a barrel in the past month because of concerns about limited refining capacity and rising demand worldwide for gasoline and diesel.

Every dollar increase in futures prices for light sweet crude oil, which is refined for gasoline, translates into roughly a 21/2-cent increase at the pump.

The price increase is expected to affect the diesel fuel market even faster, due to lower inventories.

Gasoline prices nationwide averaged $2.13 a gallon for regular unleaded, according to AAA's fuel gauge report released Monday. That is up 40 percent over the past two years, but still below the all-time high retail price of $2.276 a gallon reached on April 11. In the Tampa Bay area, regular averaged $2.096 a gallon, mid range $2.271 and premium $2.313.

Light sweet crude for July delivery climbed 90 cents Monday to settle at $59.37 a barrel, a record close on the New York Mercantile Exchange, where oil futures have been traded since 1983.

While Nymex oil futures are more than 50 percent higher than a year ago, they are still below the inflation-adjusted high above $90 a barrel set in 1980.

James Williams, who has been forecasting oil prices for 20 years, said the surge in futures prices reflects a market that is stressed to the max.

"Inventory has historically been the best indicator of price, but that hasn't been the case here," said Williams, who owns WTRG Economics in London, Ark. "This speculation is due to the risk associated with the lack of any spare production capacity. The industry is at 99 percent capacity. If we lost production from any country, we could see $90 a barrel."

Williams is quick to say he's not predicting such a spiral, however, adding that the lack of capacity makes for a "virtually unpredictable market."

One of the major wild cards in the pricing equation is demand, which continues to grow despite higher prices. U.S. government data released last week showed gasoline demand is up almost 3 percent from a year ago at nearly 9.5-million barrels a day - a growth rate that surprised many analysts.

While rising jet fuel costs have been a major problem for the airline industry, higher energy prices have not taken as much of a toll on the broader economy as analysts had previously feared. In the first three months of the year, the U.S. economy grew at a 3.5 percent annual rate, according to the Commerce Department, slightly slower than the 4.5 percent pace a year earlier.

"The economy has accepted $50 oil. We accepted $2 gasoline too," said oil tycoon Boone Pickens, who runs a billion-dollar hedge fund that invests in energy commodities and equities. "I think within a year from now, you're probably looking at $3 gasoline and you're probably looking at something over $60 for oil."

WTRG's Williams said he thinks oil will have to reach about $70 a barrel before people change their consumption patterns.

"As a percent of total income, gasoline is not that big (right now)," he said. "People will do without a McDonald's hamburger to afford the gas."

Deborah White, an economist at Societe Generale SA in Paris, believes the magic number that may lead to a change in consumer behavior is $65 a barrel or more.

"It's economic growth that's boosted prices," which aren't hurting U.S. consumers, White said. Prices could reach $60 as soon as this week, she says.

China, which has led oil demand growth for three years and surpassed Japan as the world's second-largest consumer after the United States, last week reported a bigger-than-expected increase in industrial output for May.

"The only thing that will stop prices going up is for them to rise to the point where they start hurting the economy," said Gal Luft, executive director of the Washington, D.C., Institute for the Analysis of Global Security. "The question is: How high should oil prices rise before they slow down China and India?"

--Times staff writer Kris Hundley contributed to this report, which includes information from the Associated Press and Bloomberg News.

[Last modified June 21, 2005, 02:30:30]

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