As oil prices near $70, experts see danger

updated 9:40 p.m. ET March 31, 2006

WASHINGTON - Oil prices appear headed back toward $70 a barrel, a level not seen since Hurricane Katrina battered the Gulf Coast and sporadic shortages sent gasoline at the pump above $3 a gallon nationwide.

While last summer’s price spike triggered outrage in Congress and hurt sport utility vehicle sales, it caused only a hiccup in motor-fuel consumption. And for now, with demand back on the rise, the economy seems capable of absorbing uncomfortably high prices.

Analysts warn, however, that consumers and businesses could be just one major supply disruption away from more serious financial consequences.

Sherry Cooper, chief economist at BMO Nesbitt Burns, said the ramifications of $70 oil and $3-a-gallon gasoline would be “more mild” the second time around “because we’re getting kind of used to it.”

But while the gas-price sticker shock may be wearing off, Nomura Securities chief economist David Resler fears a more subtle fuel-related angst settling in among consumers.

“There is the pessimistic notion that this is not going to go away and that’s going to have a more lasting impact on driving habits and behavior, I suspect, than we’ve seen so far,” Resler said.

In that context, a hypothetical supply disruption that jolts oil prices to $80 or higher and keeps them there for an extended period — say, three months — could result in “a substantial falloff in discretionary spending” that snowballs into a serious slowdown.

Overseas tensions
Perhaps the top threat for the oil market is the standoff between the United Nations and Iran, OPEC’s No. 2 producer, over Tehran’s nuclear energy ambitions. Iran’s foreign minister said Friday his country would not use oil as an economic weapon, and that helped ease prices, but analysts say they remain concerned about supplies from Iraq, Russia, Venezuela and other places.

Unrest in Nigeria has taken more than 500,000 barrels per day of oil off the market, and more than 300,000 barrels per day of Gulf of Mexico output remains shut-in because of damage from last fall’s hurricanes.

With global oil demand expected to average 85 million barrels per day in 2006, and excess production capacity limited to 2 million barrels per day, oil analyst Jamal Qureshi of PFC Energy in Washington said prices aren’t likely to retreat anytime soon.

“The market is awakening to the scope of the risks,” said Antoine Halff, director of global energy Fimat USA in New York.

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