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Rising oil prices add to
mix of negativity on
Wall StreetCompanies that depend on energy
consumption will suffer if crude
prices top $40 a barrel
NEW YORK >> 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 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, 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 a 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 was captured.
"There's so much nervousness about the whole Mideast region because of the Iraq 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 yesterday 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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