Oil Costs To Offset Stimulus Package
Saturday, May 10, 2008
On the eve of President Bush's visit to Saudi Arabia, crude oil prices set a record for the fifth day in a row yesterday, eating into tax rebates being mailed to U.S. households and prompting FedEx to slash its quarterly earnings forecast by $100 million because of rising fuel costs.
Since Congress and Bush unveiled an economic stimulus package Jan. 24, the price of the OPEC basket of crude oil has jumped by $32.51 a barrel, raising the cost of U.S. oil imports enough to offset the entire stimulus package over the course of the year.
FedEx said that fuel surcharges had not kept pace with rapidly rising fuel costs and that the sluggish economy had dampened demand for the company's services.
With global oil supplies unlikely to increase substantially this year, many analysts say that the relentless rise in petroleum prices, which have doubled in the past year, could continue until the world's thirst for oil slackens. Goldman Sachs issued a report this week suggesting that prices could reach $150 to $200 a barrel within six to 24 months.
Yesterday the price settled at $125.96 on the New York Mercantile Exchange and passed $126 in extended trading. The surge in prices helped drive stocks down. The Dow Jones industrial average fell 120.90 points Friday, or 0.94 percent, to 12,745.88.
"We're engaged in a painful experiment in discovering how high the price has to go before it really, really hurts, before it hurts enough to slow demand globally," said Adam Sieminski, chief energy economist for Deutsche Bank.
There were signs this week that it may be hurting enough already and that gasoline demand in the United States, which accounts for more than one out of 10 barrels of oil consumed worldwide, may be falling. The nation's second-biggest credit card company, MasterCard, said demand for motor fuel fell 2.5 percent last week from the week before.
Philip K. Verleger, an oil consultant based in Aspen, Colo., said that a study of California Franchise Tax Board records suggested that January motor fuel consumption in the country's biggest state plunged by 4.5 percent.
Figures released by the Energy Department's Energy Information Administration released were more ambiguous. The group said that deliveries of gasoline, after falling for the first three months of the year, increased by 0.3 percent in April. Nonetheless, the EIA is forecasting a drop of 190,000 barrels a day in U.S. fuel and other petroleum use this year; after accounting for increased ethanol use, EIA expects petroleum consumption to decline by 330,000 barrels a day.
Mark Cooper, director of research at the Consumer Federation of America, estimated that energy expenditures by U.S. households increased to more than $5,300 from about $2,600 from 2002 to 2008. The jump "represents an increase from 5 percent of household income to 8 percent," he said in testimony before Congress this week.
In the past, signs of what OPEC officials call "demand destruction" would prompt an increase in oil exports by countries to bring down prices.
Yesterday the chairman of Libya's national oil company, Shokri Ghanem, told Bloomberg News he would support a gathering of OPEC ministers before their next scheduled meeting in September to consider increasing production to "ensure market stability."
But analysts, traders and sources familiar with OPEC policy said it was unlikely that Saudi Arabia or other members of the cartel would boost output.
"There is clearly no shortage of oil in the market," OPEC Secretary General Abdalla Salem el-Badri said Thursday.
Badri said that commercial oil stocks in industrialized countries remain above the five-year average, enough to cover 53 days. He noted that U.S. crude inventories rose last week, and he blamed high oil prices on investors seeking "better returns" in commodities after a drop in equity prices and the value of the dollar.
Bush's visit isn't likely to extract any boost in output by Saudi Arabia, the only country with a large amount of excess production capacity. The kingdom has about 1.5 million barrels a day of excess capacity, though most of that oil is relatively low quality and is in less demand because many refineries are unable to process it effectively.