BUSINESS Oil prices are up now, but surge might be short-term


Oil prices are up now, but surge might be short-term

AP staff | AP

07:58, November 14, 2017


In this Monday, Oct. 30, 2017, file photo, Cristian Rodriguez fuels his vehicle in Sacramento, Calif. The price of oil has risen by about one-third since the summer, but many experts think the surge won’t last. They point to growing U.S. production. Still, higher prices for energy could translate into higher prices for airline tickets and consumer goods. (AP Photo/Rich Pedroncelli, File)

Oil prices have jumped by about one-third since the summer on signs of stronger economic growth around the world and fear of instability in the Middle East.

So far, however, the run-up isn’t setting off alarm bells. Prices remain far below their 2014 peaks. And U.S. producers are pumping at a record rate, leading some experts to bet that the higher prices won’t last long.

At midday Monday, Brent crude, the benchmark international price, was down 27 cents to $63.25, while the standard for U.S. oil was up 10 cents to $56.84.

Those are sharp increases since mid-June — about 35 percent for U.S. crude, nearly 40 percent for Brent.

“That means slightly higher inflation, but we’re not talking about unmanageable prices,” said Diane Swonk, chief economist of DS Economics. “If it got back to $100 a barrel, then we would have a real problem.”

Swonk said discretionary spending by consumers seems to be holding up despite the increase that has already shown up at the pump. In her mind and those of other economists, we are in better shape to manage higher energy prices for many reasons including a stronger economy and job growth.

Still, consumers will feel the effect, even if it’s less dramatic than price spikes in 2008 and 2014. In the U.S., the average price for a gallon of regular gasoline has risen 30 cents since early July.

Moody’s Analytics estimates that if the elevated oil prices last a year, they would cost U.S. consumers $30 billion and shave a couple tenths of a percentage point off the nation’s economic output.

Chris Lafakis, an energy analyst at Moody’s, said airlines and delivery companies such as FedEx and UPS will see profits reduced partly because they can’t raise prices quickly enough when fuel costs rise. Oil-producing countries and oil companies — including U.S. outfits such as Exxon Mobil, Chevron, Devon and Anadarko — are the obvious winners, he said. Third-quarter profit at Exxon and Chevron was about 50 percent higher than a year ago, thanks to higher prices.

Jet fuel, which is closely tied to the price of oil, accounts for about one-third of an airline’s operating costs — rivaling labor as the biggest expense. Helane Becker, an analyst for Cowen and Co., said that with oil in the mid-$60s, she expects airlines to attempt to raise ticket prices.

If fuel prices continue to rise, Becker said, airlines will cut back on plans to increase flying next year. That could tighten the supply of airline seats, driving prices yet higher.

Andrew Kenningham, chief global economist at Capital Economics in London, said however that the impact of higher oil prices on companies and households will be limited because for the year as a whole, average oil prices are up only slightly over 2016.

“So far the price moves have not been huge, so the economic impact shouldn’t be that large,” Kenningham said. He called the increase in average prices for 2017 “trivial” compared with the collapse from around $115 to less than $30 a barrel that occurred between mid-2014 and early 2016.

Crude prices began rising this summer as positive signs rolled in for the world’s biggest energy-hungry economies: the U.S., Europe and China. Prices were also influenced as expectations grew that OPEC would continue to limit production next year, and on rising tension between Saudi Arabia and Iran.

Saudi Arabia, the world’s biggest oil producer, is in the midst of an internal power struggle. Its ambitious crown prince, Mohammad bin Salman, has ordered the arrests of rivals, and some think he could take a tougher line against Iran, Saudi Arabia’s rival for pre-eminence in the Middle East. That raises uncertainty about future oil supplies from the oil-rich region.

However, many market-watchers expect such Mideast tensions to boost oil prices only temporarily — unless a direct conflict breaks out between Saudi Arabia and Iran.

Meanwhile, higher prices are encouraging U.S. companies to pump more. The U.S. Energy Information Administration reported that domestic production hit a record 9.62 million barrels of oil a day in the week that ended Nov. 3, bouncing back from less than 8.5 million barrels a day as recently as October 2016.

Oilfield-services company Baker Hughes reported Friday that the number of U.S. oil rigs showed the biggest one-week increase since June.

The drilling frenzy in the U.S. could frustrate OPEC’s attempt to limit supplies and bolster prices.

Analysts at Germany’s Commerzbank say drilling activity tends to rise about four months after a rise in oil prices. So, they concluded, “there is much to suggest that last week’s rise in drilling activity marked the start of a trend.”

“It is most likely that oil prices will drop back,” Kenningham said. “Investors continue to anticipate that prices will drop.”

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