By David Parkinson
The Globe and Mail
Report on Business
Wednesday, August 31, 2005
Fifty dollars didn't do it. Neither did $60. But with oil now pushing $70 (U.S.) a barrel, the question must again be asked: Will the global economy buckle finally under the weight of soaring energy costs?
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "These oil prices demonstrate the significant impacts inflicted on consumers in a short time.”
That was high on the minds of investors yesterday, as oil prices surged again in the aftermath of hurricane Katrina, which forced the shutdown of 95 per cent of oil production off the U.S. Gulf Coast -- a region that accounts for a quarter of U.S. domestic oil output.
Crude rose $2.61 to close at $69.81 a barrel in New York, amid growing concerns about the damage the storm may have inflicted on the region's extensive production, refining and transportation facilities. Natural gas also jumped 52 cents to a record $11.66 per million British thermal units, with almost 90 per cent of the Gulf's natural gas production shut in by the storm.
The skyrocketing energy costs weighed on U.S. stocks, which have reacted badly each time crude has spiked into record territory over the past 15 months. The Dow Jones industrial average slid 50.23 points to 10,412.82, the S&P 500 lost 3.87 points to 1,208.41 and the Nasdaq composite index dropped 7.89 points to 2,129.76.
The rising energy prices were once again a boon to the Canadian market, which outperformed its U.S. counterparts. The S&P/TSX composite index rose 14.66 points to 10,573.06, as the energy group -- which makes up a quarter of the index -- rose 1.7 per cent. But seven of the remaining nine major subindexes fell, evidence of renewed worries that energy costs will derail global economic activity.
"The incremental increase in the world's oil bill is becoming an increasing risk for the global economy," independent research firm BCA Research wrote yesterday, adding that if crude prices were to stay at current levels, they would slice half a percentage point off global growth next year.
"So far, the world economy has weathered the rise in oil prices quite well. But several tailwinds that have helped offset the drag from rising oil prices are fading: The global housing boom has peaked and the [U.S.] Fed is steadily tightening the monetary taps," it said.
Analysts are concerned about not only the impact of higher energy prices on the burgeoning recovery in global industrial activity but, more importantly, the potential drag on consumer spending. Earlier this month, the world's biggest retailer, Wal-Mart, lowered its sales forecast for the second half of the year, blaming high fuel prices for slicing into its customers' pocketbooks. And that was before the latest surge in prices, which comes at a particularly sensitive time for the retail sector -- the critical back-to-school season.
"These oil prices demonstrate the significant impacts inflicted on consumers in a short time," financial adviser Adrian Mastracci, president of KCM Wealth Management Inc., said in a note yesterday. "No wonder the markets can get rattled from one day to the next. Clearly, they don't like the uncertainty of the global economic pulse."
Yet the U.S. Conference Board's latest consumer confidence numbers, published yesterday, showed surprising strength in the face of elevated fuel prices:
The index rose to 105.6 for August, from 103.6 in July. Several economists noted that the U.S. labour market remains relatively healthy, a factor that has, so far, outweighed consumers' concerns about fuel prices.
But the mood could turn gloomier as the weather cools and high-priced heating bills start to roll in. The price of heating oil is up 11 per cent in the past two days.
"I think if you look at the near term -- Q3 and Q4 -- the runup in fuel costs certainly casts a cloud over the consumer outlook," said Vincent Delisle, portfolio strategist at Scotia Capital, adding that this could well put temporary downward pressure on stocks, in Canada as well as the United States. "I can't see how this won't have an impact on demand for commodities, including energy."
He said the effect could be similar to the pullback in the markets last spring, when a 27-per-cent surge in gasoline prices caused investors to reassess their earnings expectations.
But longer term, "you have to look at jobs and the housing market," he said. As long as long-term interest rates remain low, those economic drivers should hold up, fuelling consumer wealth.
Still, he agrees that we're now in uncharted territory with energy prices, and how consumers will respond is the big question mark hanging over the markets.
"From $40 to $60, we didn't see much impact. Maybe from $60 to $70, we will see some strain on the consumer side."
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