Oil price at $110 may trigger pain U.S. CEOs weathered at $100

March 2 (Bloomberg) -- Amrita Sen, a commodities analyst at Barclays Capital, talks about the outlook for oil production in the Middle East amid social unrest in Iran and Saudi Arabia. She speaks with Maryam Nemazee on Bloomberg Television's "The Pulse."
By Will Daley
(c) 2011 Bloomberg News
Monday, March 7, 2011; 4:56 PM

March 7 (Bloomberg) -- A recovering economy helped U.S. chief executive officers weather crude's surge past the $100 mark. At $110 a barrel, the pain would start to kick in.

As oil traded at 29-month highs last week on concern that violence in Libya would further crimp Middle Eastern supplies, CEOs said they were waiting to see how much the price rises, and for how long.

"Any time something like oil goes up dramatically overnight, it becomes very hard to adequately plan," said Samuel Allen, 57, chairman and CEO of Deere & Co., the world's largest maker of agricultural equipment. "It has caused us to be more careful or cautious in watching the outlook, but we have still moved forward with all our plans."

Corporate assumptions would have to start changing when oil reaches $110 a barrel, according to economists such as Chris Low of FTN Financial in New York. Crude at that price would offset the benefit from the tax cut approved by Congress in December, and begin to slow economic growth, Low said.

"As long as consumers are willing to pay up a little more, there really isn't going to be a significant impact," Low said in an interview. "But we're pretty quickly running out of time there with oil through $100 a barrel. We're getting to levels where we have to think about taking our forecasts lower."

Oil for April delivery rose $1.02 to $105.44 a barrel on the New York Mercantile Exchange, the highest settlement since Sept. 26, 2008. That pushed the gain to 22 percent since Feb. 18, when crude began climbing as Libya's civil strife stoked concern that energy exports elsewhere in the region might also be at risk. Brent crude, the London benchmark used to price many European and African oils, slipped 93 cents to $115.04 a barrel.

As manufacturers such as Deere assess how prices may affect business, consumer companies already are adapting. U.S. airlines have enacted six broad fare increases in 2011, and General Motors Co. is tightening the stock of autos in case buyers shun showrooms as they did in 2008 when gasoline peaked at $4.11 a gallon before the financial crisis.

"We worry about $100 oil all the time," Vice Chairman Stephen Girsky said in an interview. "We're war-gaming that all the time. Part of the strategy is to keep inventories low."

GM's supply of 517,000 vehicles at the end of February represented about 2.5 months of deliveries, compared with about 2.9 months' worth a year earlier at the Detroit-based automaker. The clampdown came amid industrywide sales running at the fastest annual pace since 2009.

Consumers' response to costlier gasoline is pivotal because they account for about 70 percent of the U.S. economy and feel oil-market disruptions with every fill-up, economists said. At $3.51 a gallon yesterday in a survey by Heathrow, Florida-based motorist group AAA, the average U.S. retail price for regular unleaded gasoline has risen about 14 percent this year.

The duration of higher prices will determine how consumers react, said Daniel Yergin, chairman of IHS-Cambridge Energy Research Associates Inc. in Cambridge, Massachusetts, and author of the 1991 oil-industry history "The Prize: The Epic Quest for Oil, Money and Power."

"If it's a short term, then take it in stride," Yergin said in an interview. "If it's longer term, if it extends out weeks or months, then it really becomes a very big question mark for economic recovery."

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