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Subject: [globalnetnews-summary] Oil's march to $100 marks tipping point
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Oil's march to $100 marks tipping point
From Thursday's Globe and Mail
January 3, 2008 at 12:34 AM EST
Oil prices rose to $100 (U.S.) a barrel yesterday, reaching that key
symbolic barrier for the first time.
The shift into triple digits was prompted by a mix of international
developments: violence in oil-exporting Nigeria and Algeria, a slump in the
U.S. dollar and a warning that the OPEC oil cartel may eventually fall
short of supplying its share of global demand.
Rising tensions in Pakistan, Kenya and North Korea, and colder weather in
the northeastern United States also helped push up prices.
The price stayed at $100 only briefly - crude futures contracts for
February delivery finished yesterday's session at a new closing high of
$99.62, up $3.64.
Still, elevated crude prices have more than just psychological
significance: They could light a fire under Canada's already red-hot oil
patch, while putting a dent in economies around the world.
Sustained oil prices in the $100 range could be particularly damaging at a
time when the United States is reeling from a housing-induced decline,
economists said yesterday.
While the upward march of oil prices past $70, $80 and $90 a barrel
generated remarkably minor tremors, the $100 mark could be a tipping point.
"The big surprise so far has been that the quintupling of oil prices in
the past five years hasn't had a bigger impact," said Nariman Behravesh,
chief economist with Global Insight Inc. in Lexington, Mass.
In a low-inflation, high-competition world, industries such as airlines
could cut costs elsewhere to absorb higher fuel prices, he said. Central
banks also have helped keep inflation in check, and cheaper
Asian-manufactured goods have put downward pressure on prices.
The concern now is that the U.S. economy is already suffering, so
businesses are much more likely to be hurt by sustained high oil prices,
Mr. Behravesh said.
"In the case of the U.S. especially, but increasingly in other parts of
the global economy, as things slow down, the damage from $100 oil will be
greater than when growth was more rapid," he said.
"When growth is 3 to 3.5 per cent, the economy can shrug off $100 oil.
When growth is 1.5 per cent, that's a very different story."
Economists are expecting the United States to report growth of just over 1
per cent for the fourth quarter of 2007, and only about 0.5 per cent in the
first quarter of 2008. European economic growth isn't expected to be as
As a result of slowing economies around the world, "$100 oil could begin
to do some serious damage," Mr. Behravesh said.
Patricia Croft, chief economist at Phillips Hager & North Investment
Management Ltd., said her biggest worry is how much high oil prices will
push up inflation.
Inflationary pressures began to show up globally in 2007 because of energy
prices, she said, and this trend is "keeping central banks on edge."
She, too, was surprised that the global economy has been so resilient as
oil prices rose.
In theory, demand for energy should have declined as prices rose, but that
did not happen. One reason is that energy consumers have become more
efficient in their use of oil.
Another mitigating factor was that countries such as China and India have
been heavily subsidizing domestic oil purchases, Ms. Croft said. But this
could change if prices stay above $100.
And if higher consumer product prices - boosted by higher energy costs
- slow the U.S. economy, watch for reverberations in Canada and around
the world, she said.
"In the U.S., in particular, consumers face declining house prices, a
softening labour market, and now high food and energy prices. [Higher oil]
could be part of the mix that creates the long-awaited slowdown in consumer
Canada was protected from the U.S. decline as long as the pain was confined
to the housing sector. But if it spreads more broadly, there will be
effects on this side of the border, particularly in Eastern Canada where
the high Canadian dollar has already hit manufacturers.
Bart Melek, global commodity strategist at BMO Nesbitt Burns, said
Canadians should be prepared for the surge in crude to translate into
higher prices. But he also noted that high oil prices will likely support
the Canadian dollar.
The average national cost for a litre of gasoline reached $1.07 (Canadian)
in the week ended Dec. 31, according to a regular survey from Calgary-based
MJ Ervin & Associates Inc. A year earlier, when crude oil was trading at
$61 (U.S.), the average retail price at Canadian pumps was 92.3 cents a
Cathy Hay, a senior associate at MJ Ervin, said a dollar rise in crude
prices boosts Canadian pump prices by about six-tenths of a cent. "So
while today's gains are profound on the global crude markets, the impact at
the pump in Canada is not particularly noteworthy."