Crude oil prices surged to $60 a barrel yesterday -- only briefly but long enough to renew worries about economic growth and to send stock prices tumbling.
For airlines weighted down by high jet fuel prices, the jump yesterday raises the prospect of still further financial hardship in the months ahead.
By the end of trading, U.S. benchmark crude for August delivery closed at a record $59.42 a barrel on the New York Mercantile Exchange, up $1.33. Adjusted for inflation, oil prices remain well below the peak of 1980.
The Dow Jones industrial average suffered its worst loss in two months, closing down 166.49 points, or 1.6 percent, at 10,421.44.
So far, the rise in oil prices has done little to slow U.S. economic growth over the past year -- surprising some analysts who had predicted $50 oil would tip the nation into recession. But economists are concerned that at some point, sustained higher energy costs could drag the slowing U.S and world economies into a serious downturn.
Oil prices are moving higher as demand grows in China, the United States and elsewhere. China's huge appetite for oil was reflected in an $18.5 billion bid for Unocal Corp. launched late Wednesday by CNOOC Ltd., the country's third-largest oil company.
Oil traders worry about the world's diminishing ability to pump additional oil from the ground as the global thirst grows and that a disruption in supply could lead to shortages. Limited refining capacity also has created a bottleneck, causing upward pressure on prices.
Demand for diesel and jet fuel is so strong worldwide because of economic growth that it is contributing to the run-up in oil prices, analysts said.
"Sometimes the crude drives up the price of the products," said Philip Flynn, an analyst with Alaron Trading Corp. in Chicago. "In this case it's the price of the products driving up the crude."
Domestic demand for distillate, used for diesel, jet fuel and heating oil, is up nearly 7 percent for the four-week period ending June 17, compared with the same period last year, according to the Energy Department. Demand for distillate also is increasing in Europe, China and elsewhere.
Rising crude prices are sending gasoline prices higher, causing more pain at the pump for consumers who have grudgingly grown accustomed to paying more than $2 a gallon for gasoline. Analysts said they expected gasoline prices to continue moving higher.
While oil traders worry about shortages -- particularly later this year -- researchers for Cambridge Energy Research Associates, a private firm that provides information to the industry, have concluded that enough oil supplies will come on line in coming years to meet demand.
For now, however, the airline industry is scrambling to find ways to compensate for higher fuel prices. The industry says carriers this year are paying more than twice as much for fuel compared with 2002.
Several major airlines this week sought to raise summer ticket prices, but some industry observers doubt that strategy will work because of the intense competition with low-fare carriers. Airlines have tried to generate savings by taking steps such as removing pillows from cabins and adding winglets to planes to improve aerodynamics and save a little fuel.
"Jet fuel is single-handedly this year the number one factor precluding us from break-even or slightly in the black," said John Heimlich, vice president and chief economist of the Air Transport Association of America, the airline industry's lobbying group. "It's obviously especially problematic because it's a time when we have so little pricing power."
The impact on the economy has been less severe. Consumer spending fell last summer after oil first passed $40 a barrel and earlier this year as prices passed $55 a barrel. But both episodes proved to be temporary and were followed by healthy rebounds. The economy expanded by a robust 4.4 percent last year and grew at an above-average 3.5 percent annual rate in the first three months of the year.
Recent oil price surges have not been enough to significantly slow a U.S. economy that is far less dependent on oil than decades ago, when price spikes could lead to recessions. While increases in oil prices have caused inflation to flare temporarily, competition has largely prevented businesses from raising consumer prices for non-energy items.
Archie Nichols, owner of a small trucking company in North Wilkesboro, N.C., said he has not been able to pass along higher diesel fuel prices to consumers.
"Diesel prices is killing us," Nichols said. "So far we've been eating it. It hurts the bottom line, it sure does."
Staff writers Sara Kehaulani Goo and Nell Henderson contributed to this report.