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Dow plunges as oil prices surge

Mideast tension and skyrocketing oil prices join a host of other concerns to send U.S. markets reeling.

By ASSOCIATED PRESS
Published July 14, 2006

NEW YORK - Stocks plunged for a second straight session Thursday as Wall Street battled a storm of negative factors: a record surge in oil prices, interest rate jitters and a slowing economy. The Dow Jones industrial average dropped almost 167 points, bringing its two-day loss to 288.48 points.

Escalating tension in the Middle East carried oil past $78 a barrel in after-hours trading, after rising $1.75 to settle at a record $76.70 on the New York Mercantile Exchange amid new Israeli attacks on Lebanese bases and Iran's hard-line stance on its nuclear program.

That further compounded worries over Merrill Lynch's warning that higher lending rates and gasoline prices would likely pressure consumer spending at Wal-Mart Stores Inc. SAP AG rattled investors further after reporting weak software sales last quarter.

U.S. gasoline demand continues to rise despite pump prices near $3 a gallon, but core inflation remains relatively low and the U.S. economy is forecast to grow by roughly 3 percent in the second half of the year.

Nationwide, the average price of a gallon of regular unleaded gas Thursday was $2.961, up about 3 cents since July 5, 6 cents in the past month and about 64 cents higher than it was a year ago.

Tampa Bay area drivers were paying slightly less, as usual. Local gas prices averaged $2.869 per gallon on Thursday. The average price across Florida was $2.927. But the record highs in oil futures are expected to push Florida toward the $3 threshold.

"Two years ago, I might have said that $70 or $75 a barrel would be some kind of a tipping point. Now I'm not so sure anymore," said Nariman Behravesh, chief economist at Global Insight, a private forecasting firm.

Behravesh said lower-income Americans are suffering disproportionately from higher energy costs and "I could certainly make a policy case for helping them out on a temporary basis."

Adjusted for inflation, oil prices would need to rise to about $90 a barrel to exceed the highs set a quarter-century ago when supplies tightened in the aftermath of a revolution in Iran and a war between Iraq and Iran.

Today, oil prices are being pushed higher by rising global demand and worries that the world's limited supply cushion would not be adequate to offset a lengthy disruption to output in major producing countries, such as Iran or Nigeria. There are also concerns about the risks hurricanes pose to U.S. production.

The latest fear being priced into the market is that the conflict between Israel and Lebanon could spill over into other corners of the Middle East, the region that produces nearly a third the world's oil and contains almost two-thirds of its untapped reserves.

Many on Wall Street worried that the day's headlines signaled a worst-case scenario. Continued gains in energy prices could prompt the Federal Reserve to keep lifting interest rates to contain inflation, but the recent spate of downbeat earnings news suggested that economic growth was already moderating. Investors fear higher rates in a cooling economy could lead to a recession.

"At this point in the cycle, you have questions about how much inflation is rising, what the Fed will do and how much growth will slow," said Scott Wren, senior equity strategist at A.G. Edwards & Sons. "That's a debate that's going to be worked out over time. If you're going to buy stocks, you have to take a stance" on where those numbers are headed.

The Dow slid 166.89, or 1.52 percent, to 10,846.29. On Wednesday, the blue-chip index sank 121 points.

Broader stock indicators declined. The Standard & Poor's 500 index lost 16.31, or 1.3 percent, to 1,242.29; and the Nasdaq composite index dropped 36.13, or 1.73 percent, to 2,054.11, its lowest level since last October.

Although consumers and businesses have so far appeared to weather the persistently high price of oil, an uneasy start to second-quarter earnings has investors nervous about a potential downturn in the economy. Analysts have insisted that the economy remains sturdy and that the market's pessimism is overdone.

"There is definitely negative momentum to the news," said Philip Dow, managing director of equity strategy at RBC Dain Rauscher. "It makes people believe we are genuinely headed for a bear market. But we have to have a bad economy for that to happen, and I don't think we have one."

Manufacturing conglomerate General Electric Co. releases its earnings this morning, but Dow said a strong report might not be enough to counter worry about the Middle East conflict and boost stocks. "My bet is when all is said and done, we'll have a much more balanced reaction to the second quarter," Dow said.

In economic news, the Labor Department said the number of first-time applications for jobless benefits rose 19,000 to 332,000 last week, a possible sign of an impending slowdown in the economy. Analysts had forecast an increase of 7,000.

[Last modified July 14, 2006, 01:07:15]