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Oil Prices Add to Wall Street Negativity
By MEG RICHARDS, AP Business Writer
NEW YORK, March 18- You can add oil prices to the growing
mountain of negatives that has sent the stock market tumbling over
the past few weeks.
With crude oil futures trading at levels not seen since the run-up
to the first Gulf War (news - web sites) in October 1990, rising
energy prices ultimately could weaken the solid corporate earnings
that have been investors' sole consolation amid the market's recent
volatility. If gasoline prices top $2 a gallon this summer, as some
analysts predict they may, it could dent consumer confidence and
become a point of contention in the presidential campaign.
"If prices continue to rise significantly, it will become much
more of a hot button issue," said Ken McCarthy, chief economist
for vFinance Investments in New York. "Paying over $2 for regular
will get a lot of people's attention."
U.S. demand for energy has risen steadily as the economy has improved,
but supplies of crude oil are tight, and likely to get even tighter
if the Organization of Petroleum Exporting Countries goes ahead
with planned production cuts next month. Terrorism fears and political
unrest in Venezuela, the world's No. 5 oil exporter, have further
rattled investors, and the prospect of continued rising demand from
China has contributed to price gains.
Corporate bottom lines aren't in imminent danger — shippers
and airlines typically pass energy price hikes on to consumers in
the form of fuel surcharges — but in an already-nervous market,
investors are quick to worry about worst-case scenarios. And as
the benefits of tax refunds and mortgage refinancings start to wane,
higher fuel prices are sure to gain significance among consumers.
"You're not going to see companies taking down guidance because
of rising oil prices," said Jeff Kleintop, chief investment
strategist for PNC Financial Services Group in Philadelphia. "But
if job growth doesn't pick up and fuel prices stay this high, that
could call into question the overall pace of economic growth, which
certainly would have an effect on businesses."
OPEC (news - web sites), which supplies about a third of the world's
oil, had long kept prices in a range of $25 to $30 per barrel —
high enough to maintain revenues but low enough not to encourage
conservation efforts or the development of alternative energy sources.
But when the dollar started to weaken last summer, the group raised
its price band to $30 to $35. With April oil futures topping $38
per barrel, many analysts say the stage is set for prices to surge
past $40.
If oil prices continue to soar and remain high for a long period,
businesses that depend on energy consumption are bound to suffer.
The transportation sector would be most vulnerable, and auto companies
would probably see a drop in sales of higher priced gas guzzlers,
like sport utility vehicles and trucks. Conversely, oil and gas
producers and businesses that support those industries could make
gains.
Despite some sector-specific consequences and additional burdens
for consumers, analysts say a long period of high oil prices probably
wouldn't significantly stall economic expansion in the United States.
Energy costs account for only tiny percentage of most business budgets,
meaning economic growth is far less vulnerable to price changes
than it has been in the past.
"We've come a long way since the energy crisis days of the
1970s and '80s," McCarthy said. "Increased auto fuel economy,
more efficient heating systems and many other factors have permanently
reduced the amount of energy it takes to generate economic growth."
Still, investors are watching the oil market closely, and tend to
react with knee-jerk precision to any event that affects the stability
of the world's key oil-producing regions. Oil futures rose after
the Madrid bombings were attributed to extremists linked to the
al-Qaida terror network, and fell on reports that an important al-Qaida
member might have been cornered in Pakistan. Most traders believe
oil prices would fall if Osama bin Laden (news - web sites) was
captured.
"There's so much nervousness about the whole Mideast region
because of the Iraq (news - web sites) war and the war on terrorism,"
McCarthy said. "Anything that would reduce that uncertainty
would take oil prices down."
The Dow Jones industrials ended the week down 53.48, or 0.5 percent,
finishing at 10,186.60. The Standard & Poor's 500 index lost
10.79, or 1.0 percent, to close at 1,109.78.
The Nasdaq fell 44.26, or 2.2 percent, during the week, closing
Friday at 1,940.47.
The Russell 2000 index, which tracks smaller company stocks, closed
the week 12.10, or 2.1 percent, lower, at 570.74.
The Wilshire Total Market Index, which tracks more than 5,000 U.S.
based companies, ended the week at 10,852.97, off 115.21 points
from last week. A year ago, the index was at 8,463.32.
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