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Tue November 9, 2010
Sharp rise in oil prices could hinder recovery
By JEFF BRADY
Crude oil futures took a sharp jump last week and are approaching $90 a barrel on the New York Mercantile Exchange. Back in January 2009, oil was selling for less than $32 per barrel.
Higher oil prices could hurt an economy struggling to recover. Kevin Leung, the owner of the Magic Rabbit Car Wash & Detail near Denver, says it's already damaging the bottom line at his two gas station/car washes.
"Winter is normally a good time for us to make some money," Leung says. That's because gas prices typically go down after the summer driving season. Leung can usually lower his retail prices a little more slowly than the wholesale price, giving him a few extra cents of profit per gallon.
But prices are actually going up now instead of declining so that dynamic is working against him this year. At a U.S. average of $2.80 per gallon, gasoline prices are about $1 higher than at the start of 2009. And that was as of Nov. 1, the latest date available and before last week's big run-up in crude oil prices.
Pushing Up The Price Of Oil
Leung can put some of the blame on the Federal Reserve. Last week, the Fed said it will buy $600 billion in government bonds to boost the economy. A healthier economy means people will buy more oil and that's pushing up the price.
Oil futures appear to be settling in around $85 to $90 a barrel, according to Gary Taylor, a principal with The Brattle Group. But that's only because traders don't know where prices are really headed.
"And when they don't know, they expect more of the same," Taylor says. "If the higher prices do stick around, that could hinder a fragile economic recovery. A $10 increase in the price of oil is like a $200 million tax on the economy a day."
For most of us, that "tax" translates into less disposable income for things like a $10 car wash.
Large Oil Companies Benefit
"They don't have that money anymore because all their money is going in to fill up the tank," says Leung. "Unfortunately, I don't make that $10."
Since about two-thirds of the gas price is for the crude oil it's derived from, much of that extra money will go to large oil companies. Many of them already are reporting much healthier profits than last year.
Oil giant Exxon Mobil says it earned $7.4 billion during the third quarter, up 55 percent from the same period last year, thanks in large part to higher crude oil prices.