Price of oil hits $78 a barrel

July 15, 2006

WASHINGTON -- The price of oil briefly surpassed $78 a barrel Friday and finished at a record close of $77.03 as Israeli attacks against militants in Lebanon stoked fears of a wider Middle East conflict and possible oil-supply disruption.

The rise in oil prices raised concerns about inflation and the economy at large, sending stock prices tumbling for a third day, with the Dow industrials falling 106.94, or 1 percent, to close at 10,739.35. The benchmark index has lost more than 395 points in three days, and the Nasdaq composite has skidded to a 14-month low.

The run-up in crude futures prices, 4 percent in the last week alone, is biting down harder at the pump. AAA Texas said unleaded gasoline in Fort Worth rose 2.5 cents last week to $2.905 a gallon.

"If crude stays at or near these levels for an extended period of time, retail gas prices will soon follow because demand remains strong. And motorists will see new record prices at the pumps," said Rose Rougeau, spokeswoman for AAA Texas.

But retail gasoline prices, which have risen 27 percent in the past year, have failed to keep demand from rising this summer. For the past four weeks, demand averaged 1.7 percent above year-earlier levels, according to U.S. Energy Department data.

"Demand hasn't gone down," said Kevin Beyer, owner of Performance Fuel, a gasoline retail outlet in Smithtown, N.Y. "With the price hitting $3 a gallon and above, people are not curtailing" their driving.

OPEC tried to reassure the market by stressing its commitment to "order and stability" but at the same time said it "has no influence" over the geopolitical turmoil underlying today's volatility.

Because oil accounts for more than 50 percent of the cost of gasoline, U.S. pump prices, now averaging $2.96 a gallon nationwide, up 2.4 cents from last week, are likely to climb some more, analysts say.

Gasoline futures in New York rose by 2.36 cents to settle at $2.3249 a gallon -- the highest level since late last September, when U.S. refinery output was sharply curtailed by hurricane damage. Crude oil settled at a record $77.03, an increase of 33 cents from Thursday's record close on the New York Mercantile Exchange.

"We've reached a level where we've put all the scare premium into the market that we can," said James Cordier, president of Liberty Trading in Tampa, Fla. "At this point, we have to have a disruption to move smartly higher from here."

Cordier said that although fuel demand in the U.S. is still strong, rising energy costs appear to be dampening consumer spending in other areas and that could eventually slow the economy enough to help cool energy prices.

Israel widened its of- fensive in Lebanon on Fri- day, with fighter bombers blasting the airport for a second day and cutting off the main highway to Syria. More than 80 people have died, most in Lebanon, in three days of violence sparked by the capture of two Israeli soldiers by Hezbollah militants.

Although Israel and Lebanon are not major oil suppliers, the fear is that the conflict could expand in the region, which produces nearly a third of the world's oil and has almost two-thirds of its untapped reserves.

"I don't think we're done on the upside," said Tom Bentz, a BNP Paribas Commodity Futures broker, referring to the rise in oil prices.

But on one front, there was some price relief this week.

U.S. ethanol prices, a key gasoline additive, fell from all-time highs this week, the first weekly decline in more than three months, as rising production helped meet a surge in demand for the grain-based gasoline additive.

Ethanol averaged $3.3759 a gallon Friday, down 12 percent from $3.8315 at the end of last week, according to data compiled by Bloomberg. The price had risen 14 consecutive weeks since the end of March and on July 5 reached $3.9757, the highest price since at least 1997.

Nationwide ethanol production jumped 23 percent during the first four months of this year, compared with the same period in 2005, according to U.S. Energy Department data. Production is expected to increase further as existing plants are expanded and new distilleries begin operations.

That's easing the strain on U.S. fuel shipping and blending networks after refiners earlier this year phased out a rival gasoline additive methyl tertiary butyl ether, or MTBE, said Will Babler, a broker with First Capital Risk Management.

"Some of the tightness is coming out of the system," said Babler, whose company provides hedging advice for clients, including ethanol producers. "Production and logistics are now more able to meet the need from the MTBE phase-out."

The latest average was still almost double the $1.8128 a year ago.