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Rising oil prices set off alarm
[April 19, 2006]

Rising oil prices set off alarm

(San Bernardino County Sun (CA) (KRT) Via Thomson Dialog NewsEdge) Apr. 19--Skyrocketing gasoline prices have economists worried.

On Tuesday, crude oil prices hit a record high. Locally, the average price of self-serve gasoline prices in San Bernardino and Riverside counties rose above $3 per gallon, to within a fraction of an all-time record.

These price increases could be a blip in what is becoming an increasingly volatile global oil market.

But if skyrocketing petroleum product prices persist for six months, they will have far-reaching economic consequences, economists say.

A continuation of high oil prices for an extended period of time could:

--Accelerate downward pressures on housing.

--Reduce consumer spending for entertainment, spending and travel.

--Trigger a wave of price increases across a wide range of industries and business services.

--Cause the Federal Reserve to begin a new series of interest rate hikes.

Despite the bleak forecast on the impacts of higher energy costs in Tuesday's news, Wall Street struck a more positive note with the Dow Jones industrial average gaining 194.99, or 1.76 percent, to close at 11,268.77.

Wall Street appeared to focus on news Tuesday that most of the Federal Reserve policy-makers last month believed the end of the central bank's nearly two-year rate-hike campaign was probably close at hand.

"Most members thought that the end of the tightening process (interest rate hikes) was likely to be near," according to the minutes of the Fed's closed door meeting on March 27 and 28.

While Wall Street focused on the thoughts from the Federal Reserve Board, another government report showed higher energy costs making an impact on wholesale prices that could have far-reaching effects on the economy. A big jump in gasoline prices pushed inflation at the wholesale level up in March at the fastest pace in three months.

The 0.5 percent increase in wholesale prices in March was 0.1 percent higher than Wall Street had been expecting and was driven by a 9.1 percent surge in gasoline prices, the biggest one-month gain since November 2004.

"The poor consumer is really getting beat up. Especially poor and middle income people," said Jack Kyser, chief economist for the Los Angeles County Area Economic Development Corp.

Continued concerns over a possible military confrontation with Iran is blamed for the upward movement of oil prices.

Iran has said it will continue plans to enrich uranium for commercial power generators. The United States and other countries fear that Iran will use uranium for nuclear weapons.

"I believe this celebration (by Wall Street) is premature," said Chapman University economist Esmael Adibi. "If oil prices stay at $70 for six months or longer, they will slowly trickle down from the energy sector to other goods and services."

Ryan Ratcliff, an economist at UCLA, said that a lot depends on how consumers and businesses look at the increasing gasoline prices. If people believe the gains are temporary, they won't adjust their spending habits or in the case of business, won't adjust their prices.

Jason Bennecke, president of Highland-based Gold Key Real Estate, said higher gasoline prices will compound the potential of a housing crunch. Families that have stretched themselves to the limit to buy a house, and did so with an adjustable-rate mortgage, are feeling a double-whammy now that they are paying more at the pump.

Their mortgage payment would have already increased due to the rising interest rates, which are partially the result of the Fed's rate hikes, Bennecke said.

On Tuesday, a report showed the Southern California housing market cooling in terms of the number of units sold and the rate of price appreciation.

Adibi said that higher energy prices by themselves won't trigger a collapse in the housing market.

But if the high prices persist, retailers, restaurants, movie theaters and others will feel the consumers' belt-tightening, he said.

Consumer spending is more than two-thirds of U.S. economic activity. The more people pay for fuel, the less they can spend to keep the economy growing.

"If this persists, forget about Disneyland," Adibi said.

Ratcliff and other economists note that with the growth of the Chinese and Indian economies, oil-producing countries no longer have excess capacity. That's why when there's a threat of conflict or political blip in the oil-producing world, prices skyrocket.

The world is in an era of increased (oil) price volatility, Ratcliff said.

The Sun's wire services contributed to this report.

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