Oil hits all-time high adding to consumers' woes

Setting an all-time record, oil prices rose to nearly $104 a barrel on Monday morning, exceeding their inflation-adjusted high reached in the early 1980s.

Oil futures rose as much as $2.11 to $103.95 on the New York Mercantile Exchange. That level tops the record set in April 1980 of $39.50 a barrel, which would translate to $103.76 a barrel in today's money. Oil futures settled at $102.45.

The surge in oil prices comes at a time when consumers already are feeling economic pressures from rising fuel costs.

The national average price for a gallon of regular-grade gasoline was $3.165 on Monday, according to AAA and the Oil Price Information Service. That is about 18 cents a gallon higher that a month ago and about 70 cents higher than a year ago.

In St. Louis on Monday, regular grade gasoline was selling for an average price of $2.885. In the Metro East, the average price was $3.108.

The run-up in oil and other energy prices "hits deeper and deeper into the consumers' ability to spend. With a lot of households stretched by high food prices as well, it creates real problems," said Joel Naroff, president of Naroff Economic Advisors.

Those pressures are in turn being transmitted on to manufacturers and other industries. Builders are building less, the government reported. Manufacturers are cutting back, another report said. General Motors Corp. and Ford Motor Co. said they would cut second-quarter production.

The galloping energy prices are doubly painful as the nation teeters on the edge of recession: High energy costs push companies to charge shoppers higher prices, then those consumers and businesses cut back in turn, dumping more cold water on the economy.

"It's like throwing sands in the wheels of the economy," said Brian Bethune, economist at Global Insight. "Things slow down. There is more friction and there is more complaining."

The complaints could become deafening later this year.

The Energy Department expects gas prices to peak at a record level near $3.40 this spring, and some analysts predict pump prices could rise to nearly $4 a gallon when the busy summer driving season arrives.

Diesel prices, used to transport the vast majority of the nation's goods, are also soaring. Diesel was selling at an average price of $3.51 a gallon Monday in St. Louis, about higher than a month ago and 50 cents higher than a year ago.32 cents

"Bulky items — milk, soda pop, eggs, cheese, fruits and vegetables — probably will have higher transportation costs to bring those items to stores," Bethune said. "How much of that is passed along to customers depends. In terms of overall costs of products, it might not be huge. It could be a few cents. But overall it will add up."

FORCES BEHIND THE SURGE

The latest surge in oil prices is taking place as investors seek refuge in commodities to offset a slowing economy and declines in the dollar, as well as to hedge against inflation.

The dollar fell to its lowest level in three years against the yen on Monday. It also dropped to a record $1.5274 in early New York trading against the euro following steep declines last week.

Speculative buying by oil investors can become self-perpetuating, driving prices higher and attracting even more speculators. But many analysts believe oil prices aren't justified by crude's underlying supply and demand fundamentals, and are due to fall at some point.

While supply disruptions in Nigeria and the prospect of supply cutoffs from Iraq and Venezuela helped boost oil prices last year, domestic oil inventories are now rising even as a number of forecasters are cutting their demand growth predictions due to the slowing economy.

OIL'S FUTURE?

As for where oil goes from here, analyst estimates vary widely, with some predicting an eventual decline to the $65 or $70 range as supplies continue to grow and demand falls, and others seeing oil rising as high as $120 as investment capital continues to flow into oil markets from overseas.

For its part, the Energy Department's Energy Information Administration's latest prediction is that oil will average $86 a barrel in 2008, up 19 percent from 2007, when oil averaged $72 a barrel.

THE ASSOCIATED PRESS CONTRIBUTED TO THIS REPORT.

Source:www.stltoday.com/stltoday/business/sto ries.nsf/yourmoney/story/5254D 6F4DF576E1C86257402001356 9A?OpenDocument