Markets fall as oil shoots up

Troubling news for Russia's Yukos sends crude prices to an all-time high

By NELSON ANTOSH and TOM FOWLER
Copyright 2004 Houston Chronicle

Concern over rising oil prices spilled over into the stock markets Thursday, causing the Dow Jones industrial averages to plunge more than 160 points.

Oil shot up $1.58 to close at an all-time high of $44.41 a barrel Thursday.

The rise also caused an immediate jump in wholesale gasoline prices, which eventually will be felt at the pump.

The culprit behind the record spike in oil prices this time was the ongoing battle between the Russian government and the world's second-largest oil producer, Yukos.

The rise came after the news that Russia pulled back on its promise to give Yukos — which owes the government $3.4 billion in taxes — access to its bank accounts.

The action raised the possibility that Yukos would have to limit its oil output at a time when the Organization for the Petroleum Exporting Countries is pumping at capacity.

Higher prices likely to be 'just bad for business'

Clay Seigle, an independent oil market strategist based in Houston, said Thursday's decline in the Dow likely was tied to the oil prices and perhaps today's report on U.S. nonfarm payrolls in July.

"Higher oil prices mean higher costs for businesses and consumers. As a result, companies may be less profitable, and consumers have less money to spend," Seigle said. "That's just bad for business."

About the only spare capacity left for oil is in Saudi Arabia, which has ramped up production to the point that it is pumping from 9.3 million to 9.5 million barrels per day, said Cambridge Energy Research Associates' Director James Burkhard.

And that comes at a time when the rate of demand growth for oil is the strongest in a generation.

That shrinks the production cushion to between 1 million and 1.5 million barrels per day, said Burkhard, a fraction of the 3 million to 5 million barrels of spare capacity the world normally enjoys.

"If Iraq was without difficulties, if Nigeria was calm, and there were no concerns about Venezuela, maybe what is happening in Russia wouldn't have as big an impact," said Burkhard.

The former Soviet Union was the world's largest producer of oil until Saudi Arabia pulled ahead around 1991 or 1992, noted the expert. But it didn't become a source of such price volatility until recently, he said.

"The activity this week shows there won't be an instant solution for the Yukos problem," Seigle said. "This is the new reality."

Futures prices for gas respond in kind

Thursday's gain in crude oil was enough to pull the futures price of wholesale gasoline on the New York Mercantile up by 4.1 cents per gallon to $1.24.

Recently, gasoline has been relatively stable, despite the soaring cost of crude, and remains well below the $1.47 per gallon wholesale price reached in May.

Demand has been flat, and inventories grew in the latest government survey.

Experts expecting drivers eventually will feel effects

The nationwide pump price still was trending downward as of Thursday, according to the AAA.

It showed an average of $1.881 per gallon, compared with $1.883 on Wednesday and $1.886 per gallon a month ago. The high was reached on May 26 when the pump price averaged $2.05.

If crude prices remain at these high levels, and many expect they will, gasoline prices eventually will begin to climb, said Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University's Cox School of Business.

"The price at the pump does not reflect $44 crude oil since it hasn't maintained that price consistently," Baxter said. "You'd need to see something like $2.15-per-gallon gas to match crude oil prices."

Baxter said he and many other observers expect crude prices to stay at high levels.

"There are just too many disruptions in the supply to let it come back down," he said.