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Soaring Crude Oil and Gasoline Prices Worry US Consumers

Commodities / Gas - Petrol May 10, 2008 - 09:39 AM GMT

By: Jennifer_Yousfi


Best Financial Markets Analysis ArticleThe effects of soaring oil prices are finally trickling down to the pump and consumers are feeling the pinch.

On Friday, oil futures hit a new record of over $126 per barrel. Prices jumped 7.4% last week, with crude oil for June delivery trading as high at $126.20 on the New York Mercantile Exchange.

" Oil is a safe haven because of the weak dollar and how badly the financial sector has been doing," Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, told Bloomberg News . "There are also geopolitical concerns about places like Nigeria and Venezuela that are propping prices up."

News that the European Central Bank (ECB) would hold rates steady at 4% helped to strengthen the euro against the dollar. Meanwhile, continued attacks on oil holdings by the rebel group Movement for the Emancipation of the Niger Delta, or MEND, have severely curtailed Nigerian oil production.

Also on Friday, The Wall Street Journal reported that Venezuelan President Hugo Chavez could have ties to Columbian rebels, increasing the likelihood that the United States could be forced to place trade sanctions on one of its key oil suppliers. If Chavez is aiding the rebels, who are attempting to overthrow the Columbia's government, Venezuela could find itself deemed a "state sponsor of terror" The Associated Press reported.

" If we put on sanctions I'm sure Chavez would threaten to cut off our oil supply ," Phil Flynn, an analyst at Alaron Trading Corp., told the AP "Obviously that would have a major impact on oil prices."

But while political turmoil and a weak greenback are putting upward pressure on the price of oil, concern about how the high prices could put a damper on consumer demand dragged on stocks in the energy sector .

Exxon Mobil Corp. ( XOM ) shed $1.11, a 1.23% decline to close at $88.82 on Friday. Exxon stock was down 0.88% for the week. Chevron Corp. ( CVX ) slightly better and was up 2.17% for the week, having slumped only 0.05%, with a $0.05 loss per share to close at $97.39 on Friday. Royal Dutch Shell PLC ( RDS.A , RDS.B ), a victim of the MEND attacks, also saw declines in its class B shares over the course of the week.

Pain at the Pump

Oil has been reaching new highs for the past several months, but only recently has the impact of the soaring commodity reached the prices at the pump.

The average price for a gallon of diesel climbed to a fresh record of $4.269 Friday, up from $4.251 the day before, and up 47% from a year ago, according to AAA's Daily Fuel Gauge Report, MarketWatch reported. Meanwhile, the price for regular gasoline hit its own record high of $3.671 Friday, the report also showed.

The sluggish U.S. economy is curtailing consumer spending and the high cost of gasoline is finally starting to effect consumer behavior. People are driving less and seeking out the lowest prices at the pump according to a recent Gallup poll. From May 2 – 4, 71% of adults surveyed said that high gas prices have caused them a "financial hardship," USA Today reported.

Strong international demand for diesel fuel is also taking a toll on the cost of gas, as refiners choose to produce more diesel and heating oil at the expense of gasoline.

" Currently underway in the United States and around the globe refiners are investing to maximize diesel capacity … for obvious economic reasons," said Ryan Todd, an analyst at Deutsche Bank, in testimony prepared for a Tuesday House hearing, MarketWatch reported.

Diesel currently demands a higher price than gasoline even though production costs are quite similar. In addition to the industrial demand, diesel is more often used for autos in Europe. And a strong euro is encouraging U.S. refiners to export diesel to the European Union.

Most consumers feel the pain at the pump is here to stay for the long-term and are taking steps to deal with the added costs. 

According to Federal Highway Administration data, the number of miles driven by in the United States fell in February for the fourth consecutive month. People are consolidating trips and staying home more. Interest in fuel-efficient cars and mass transit is on the rise and some consumers are even considering relocating closer to their employers. 

"This is a more significant shift in behavior than I've seen through other fluctuations in gasoline prices," Steve Reich, a program director at the Center for Urban Transportation Research at the University of South Florida, told USA Today . "People are starting to understand that this resource … is not something to be taken for granted or wasted."

News and Related Story Links:

By Jennifer Yousfi
Managing Editor
Money Morning/The Money Map Report

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