Oil Prices Presage Expensive Summer

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Oil Prices Presage Expensive Summer Increases will affect just about everything

David Lazarus, Chronicle Staff Writer Saturday, March 11, 2000 sectionssections

Think things cost a lot now? Just wait until summer arrives.

The International Energy Agency all but promised that consumer prices would head north when it reported yesterday that oil inventories in the world's richest countries have dropped to their lowest levels in four years.

It's even worse in the United States, where oil inventories have plunged to 10-year lows, according to San Francisco's Chevron Corp.

Severin Borenstein, director of the University of California Energy Institute at Berkeley, sees the reductions as a sign that ``we could have a pretty tight gasoline market.''

``It's going to be an expensive summer,'' he said. Wallet-numbing prices probably will be felt across the board. Along with shelling out more money at the pump, consumers can almost certainly expect to pay more for airline tickets, as well as for anything with a related delivery cost -- which is just about everything.

``When we had a rapid rise in oil prices in the '70s, that was a contributing factor to inflation,'' said Paul Moreno, a spokesman for the California State Automobile Association. ``It affects consumers at every level.''

The U.S. Energy Department warned earlier this week that ``retail gasoline prices are poised to surge to unprecedented levels before the spring is out.''

The state auto association said the average price of a gallon of regular, unleaded gas at self-service pumps throughout California hit $1.63 this week, up 11.5 cents in a week.

The latest numbers will be released Tuesday. ``We're well into record territory,'' Moreno said.

The International Energy Agency said deep reductions in oil inventories in the United States, Europe and Japan have led to a shortage in global petroleum supplies of about 2.5 million barrels per day.

As it happens, Qatar's oil minister said yesterday that the Clinton administration has requested that the Organization of Petroleum Exporting Countries boost output by precisely this amount. OPEC ministers are to convene March 27.

This could bring some relief at the pump, but how much remains uncertain.

In any case, it's all relative.

While most consumers will find this hard to believe, the American Petroleum Institute crunched some numbers this week and determined that, adjusting for inflation, U.S. gas prices are only marginally higher than they were back in 1972, when the average gallon nominally sold for 36 cents.

``Gas has been unbelievably cheap,'' said Edward Sattler, a professor of economics at Bradley University in Illinois. ``In real terms, it's been very inexpensive in the past few years, and that's why people have gone to SUVs.''

But many are finding that sky- high oil prices are causing nothing but headaches. Case in point: Procter & Gamble Co., maker of Crest toothpaste and other household products, blamed higher energy costs for a gloomy earnings forecast that left its share price in tatters. Yesterday, soapmaker Dial Corp. made a similar announcement, and its stock plummeted 23 percent.

In virtually all industries, higher fuel costs translate into higher production and delivery expenses, which will inevitably be passed on to consumers.

Automakers, for example, are raising delivery costs for new vehicles, while technology companies say prices for finished products could rise as the cost of petrochemical-based components increases.

But it's at the service station that most consumers will feel the full impact of surging oil prices.

``We'll all keep getting gouged,'' said the UC Energy Institute's Borenstein. ``Oil prices are tremendously high compared to what they were last year.''

Jim Huccaby, manager of pricing for Chevron, said gas prices will remain high until OPEC increases production. ``Inventories are running very, very low,'' he said.

Still, he said that low inventories do not necessarily mean America's prolonged economic boom is in danger. As long as refineries have enough fuel to keep operating at full capacity, gas should remain relatively plentiful, Huccaby said.

Chevron expects its troubled Richmond refinery, which was rocked by an explosion last year, to be running at full throttle by the end of the month.

The auto association's Moreno said increased refinery output would bring some relief at the pump. But he warned that the current low inventories do not bode well for the summer season, when gasoline demand peaks.

``If gas prices go up 50 cents and you have a car that gets 20 miles to the gallon, and you drive 1,000 miles, that will cost you an extra $25,'' Moreno said.

Average U.S. prices of $2 a gallon could arrive soon, said Roger Diwan, a consultant with the Petroleum Finance Co. in Washington, D.C. ``You need to build stocks, and you need to be able to run your refineries at a higher rate in order to meet the higher demand,'' he said.


-- Carl Jenkins (Somewherepress@aol.com), March 12, 2000

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