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Oil And Gasoline Prices Soar

Record high gasoline prices are seen Tuesday, March, 23, 2004, at a gas station in Van Nuys section of Los Angeles. Gasoline prices in the United States continue to soar
AP
The price of oil is likely to remain high in coming months and could rise further, analysts say, due to ravenous global demand and petroleum producers' reluctance to boost supplies.

Recent security problems in Saudi Arabia and Iraq have also inflamed markets. On Tuesday, prices for oil futures surged on London's International Petroleum Exchange, following Monday's run-up on the New York Mercantile Exchange, where oil futures hit a 13-year high.

Increases in oil prices typically affect the pump price for gasoline. Refineries are running flat out ahead of the peak summer driving season, but costlier crude makes it more expensive for them to produce gasoline.

The average price of regular unleaded gasoline in the United States is $1.84 per gallon, according to the Energy Department, and analysts say the cost could rise as high as $3 per gallon in some regional markets.

"In the market's perception, the greater frequency of these kinds of attacks and the greater intensity, the more the likelihood there's going to be some kind of disruption in supply that will actually hit the market in a physical way, rather than in just simply a psychological way," Oil Daily president Tom Wallin told CBS News Correspondent Jerry Bowen.

Analysts call it the risk factor, reports Bowen, the jitters that add $2 to $4 to the cost of a barrel of crude because of concerns that some day a terrorist strike will succeed.

On Tuesday, contracts of North Sea Brent crude for June delivery soared by $1.30 to $35.78 per barrel in late trading in London. Markets rose after the U.S. ambassador to Saudi Arabia, the world's No. 1 oil exporter, advised Americans to leave the country following the killings of five foreign workers at a petrochemical plant there.

In the United States, June contracts of light, sweet crude jumped 69 cents to $38.90 in afternoon trading.

"I think at this point you're probably going to go through $40. It could happen this week," said Jan Stuart, head of energy research at the New York brokerage FIMAT USA.

The Organization of Petroleum Exporting Countries, which pumps one-third of the world's oil, has reaped a windfall from higher crude prices. OPEC insists that it aims for an average target price of $25 per barrel for its benchmark blend of crude, but the actual benchmark stood 37 percent higher than this at $34.13 on Monday, the most recent day for which OPEC compiled data.

OPEC blames current high prices largely on speculators and political tensions in the Middle East.

"The dark reality is that they want money, and their horizons are very short," said Leo Drollas, chief economist at the Center for Global Energy Studies in London.

The center believes that OPEC leader Saudi Arabia now needs a benchmark price of at least $30 per barrel to balance its government budget. To firm up prices, the group has kept supplies tight, most recently by approving a 4 percent cut in its output target starting last month.

OPEC's strategy has forced importing nations to run down their oil inventories to unusually low levels, and this in turn has aggravated price volatility. Drollas argued that OPEC made matters worse by failing to anticipate China's voracious appetite for imported oil and the resurgent demand in the United States.

As a result, he said, prices have risen relentlessly since December 2001, and the official OPEC price target — a range of $22-$28 — is "as dead as a dodo."

The International Energy Agency, a watchdog for oil importers, warned Monday that OPEC's policy of tightly managing oil supplies is "dampening the current cyclical upturn" in the world economy. High crude prices are reinforcing high levels of unemployment for some industrialized nations and exacerbating budget deficits in many importing countries, the Paris-based agency said in a report.

The IEA amplified concerns that Federal Reserve Chairman Alan Greenspan expressed last week about the harmful effects that high prices for oil and natural gas might have on the U.S. economy.

"Greenspan is now saying that he's concerned. I'll vote with him," said Adam Sieminski, an oil price strategist at Deutsche Bank in London.

So far, the global economy hasn't suffered too much from costlier crude, but OPEC appears to be testing the market to see how far it can comfortably push prices, Sieminski said.

In the long run, higher prices tend to work against OPEC by making it profitable for competitors with higher production costs to pump more oil of their own. Any sharp increase in supplies can cause prices to crash.But the summer driving season is looming, and analysts said upward pressure on oil prices will only grow in coming months.