How record price of oil will affect consumers

NEW YORK — The price of oil has reached $100 a barrel for the first time, the result of growing demand from increasingly industrialized nations like China and India, and fears that there just won't be enough oil to go around. Political problems in oil-producing countries and regions have also helped send crude to new highs.

A look, in question-and-answer form, at the impact that record high crude prices is likely to have on consumers and the economy.

Q. How will $100 oil affect the prices I pay for energy?

A. Higher crude prices will almost certainly drive up the cost of refined products, although the gasoline pump may not be the first place consumers see prices rise.

"There are some immediate consequences. That's on the heating oil, diesel and jet-fuel side," said Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service. "The higher gasoline prices are further down the road."

The Energy Department's Energy Information Administration recently predicted gasoline prices will average $3.11 a gallon at the pump and peak above $3.40 in the spring.

Kloza said he wouldn't be surprised to see those estimates edge higher. He expects prices will peak closer to $3.50 or $3.75 this year.

Families that rely on heating oil are already being stung. The Energy Department predicts heating-oil costs will rise 33 percent this winter, although that number could also increase.

"Everybody gets excited about the crude price, but it's really the refined products that hit people in the pocketbook," Kloza said.

Q. How will the price of oil affect what I pay for other goods and services?

A. "These higher prices will flow throughout the economy," said Tim Evans, an energy analyst at Citigroup. "The more difficult question would be to find a product that does not have an energy component."

Higher diesel prices will drive up the cost of most goods transported on the nation's highways. Those increased shipping costs will almost certainly be passed on to consumers.

Evans said consumers likely will see increased fuel surcharges on airline tickets and higher package-delivery costs and possibly even a rise in the price of first-class mail.

Products made from petroleum itself, such as plastic and certain types of fertilizer, are also likely to be more expensive, and that in turn could push up the cost of food.

"Even the cheap, flimsy plastic caps for the top of our coffee cups will rise in cost," Evans said.

Q. What impact will higher oil have on the overall economy?

A. Analysts say consumers, whose spending is critical to economic growth, have held up well so far, even with gas already having climbed above an average of $3 a gallon. But that assessment could change if oil prices keep skyrocketing.

The impact of higher energy on the overall economy could be mixed. Major oil producers such as Exxon Mobil and ConocoPhillips stand to benefit from higher prices, while airlines, automakers and other fuel-sensitive industries could suffer.

"It very fundamentally adds to the flow of wealth from oil consumers to oil producers," Evans said.

Q. But wouldn't a U.S. economic slowdown cause oil prices to drop?

A. It depends on whom you ask. Some experts say prices at $100 a barrel aren't sustainable. Evans said he believes the high prices are a sign of a speculative bubble that will eventually burst.

"All of the implications for $100 oil are bearish. It is going to translate into less demand in the future," he said. "The higher the oil price goes, the less the upside potential remains, and the larger the downside risk becomes."

But others disagree. Jeffrey Rubin, the chief economist of CIBC World Markets, has for months been predicting oil would reach $100 a barrel based on fundamental market realities. He told investors in October to expect "a world of triple digit oil prices for the foreseeable future."

No one really knows how high prices could go.

"Most analysts feel that geopolitical conflicts are causing the current run-up and that the balance of supply and demand suggests a lower price," Wyss said. "However, we have been saying that for a while, and prices keep going up."