Oil prices near $104 a barrel as dollar falls to historic low against euro


By Jad Mouawad Published: March 3, 2008

NEW YORK: The price of oil rose Monday to nearly $104 a barrel after the dollar fell to a historic low against the euro, setting a record and exceeding the inflation-adjusted high reached in the early 1980s during the second oil shock.

Oil futures touched $103.95 on the New York Mercantile Exchange, topping the record set in April 1980 of $39.50 a barrel, a level that would translate to $103.76 a barrel at current values.

Oil prices are surging as investors seek refuge in commodities to offset a slowing U.S. economy and declines in the dollar.

Financial institutions, like pension funds and hedge funds, are also investing heavily in oil and other commodities as a hedge against a rise in inflation, analysts said.

That trend is expected to continue, especially after Ben Bernanke, the chairman of the Federal Reserve, signaled last week that he was ready to cut interest rates further to bolster growth despite rising consumer prices.

"When investors lose confidence in the central bank, they tend to look for hard assets," Philip Verleger, an independent economist and oil expert, said. "The Fed's capitulation on inflation is driving investors to commodities. The problem is there are no sellers. This means futures prices will keep rising."

The California Public Employees' Retirement System, or Calpers, the largest U.S. pension fund, said last week that it might increase its commodities investments sixteenfold to $7.2 billion through 2010 to tap into an across-the-board surge in commodities like gold, silver, oil and wheat.

The immediate catalyst for the spike in energy prices is the drop in the value of the dollar. Currency traders are selling dollars and buying euros to take advantage of the difference in interest rates between the United States and Europe.

The dollar weakened, continuing its steep decline of last week, and the euro rose to a record $1.5274 in early New York trading. The dollar also fell to its lowest level in three years versus the yen.

"The question for oil is where is the dollar going," said Roger Diwan, a managing director at PFC Energy, a consulting firm in Washington. "That's going to the main market mover in the short term."

Since 2000, oil prices have more than quadrupled as strong growth in demand from the United States and Asia outstripped the ability of oil producers to increase their output.

The rising prices of the past decade failed to dent global economic growth as consumers absorbed the higher costs thanks to easy credit and rising prosperity in the United States. In developing countries, government subsidies helped ease the pain. The rise in prices was a result of expanding wealth globally.

The trend has not slowed down much even with the United States economy at a near standstill. Global oil consumption is still expected to increase by 1.4 million barrels a day this year, driven by demand in China and the Middle East.

Still, the surge in oil prices is markedly different from the energy crises of the 1970s and 1980s. Those were brought about by sudden interruptions in oil supplies, like the in 1973 Arab oil embargo, the Iranian revolution of 1979, or the outbreak of the war between Iran and Iraq in 1980.

At the time, the global economy was much more dependent on oil as a source of energy than it is today. In the early 1980s, energy accounted for about 8 percent of disposable income in American households.

As the economy became less energy-intensive, and prices declined, that share fell under 4 percent in the early 1990s.

But in recent years, analysts have pointed out that the share of energy spending has been increasing. It reached more than 6 percent of disposable income in December.

Other energy futures also rallied on Monday. Gasoline and heating oil futures both jumped to new records. Natural gas prices, which are up 27 percent since the beginning of the year, rose 2 percent to $9.566 per 1,000 cubic feet, or 28 cubic meters.

In London, Brent crude futures rose $2.07 to $102.17 a barrel.

Gold also reached a record after several days of large gains, approaching $1,000 an ounce on Monday.

Most experts believe that the price of oil is not about to drop any time soon.

The Saudi Arabian oil minister, Ali Al-Naimi, said crude prices were unlikely to fall below $60 a barrel because the cost of developing alternative fuels, like tar sands, is rising. "Therefore, a line has been drawn below which the price cannot fall," Naimi said during an interview which was published over the weekend by Petrostrategies, a Paris-based industry newsletter.

Naimi's comments came as the Organization of Petroleum Exporting Countries prepared to meet Wednesday. Analysts expect the oil cartel to leave production levels unchanged.

The oil producing group had suggested last month that it might curb production soon to make up for a seasonal decline in oil demand. But with oil prices at their current levels, analysts said OPEC members would find it politically difficult to curb their output at this time.

Some analysts expect oil producers to trim their production informally to avert an oil surplus in coming weeks. Others said OPEC is being pulled apart by contradictory pressures.

"The market around the fringes is starting to fray," said Lawrence Goldstein, an economist at the Energy Policy Research Foundation. "Yet ironically you are looking at triple-digit oil prices because the price is being set by nonphysical investors."

U.S. manufacturing slumps
U.S. manufacturing slumped to its weakest in nearly five years in February, reinforcing worries the world's largest economy is headed for recession, while a fall in U.S. construction spending in January added to the gloom, Reuters reported.

The Institute for Supply Management said on Monday that its index of national factory activity fell to 48.3 in February from 50.7 in January. It was the weakest reading since April 2003, the month after the start of the Iraq war, and was also below the level of 50 that separates growth from contraction.

U.S. construction spending fell a sharper-than-expected 1.7 percent in January, led by a fall-off in private home building, government data showed in a report that marked a continued decline in the housing market.

Together, the reports are likely to heighten fears the U.S. economy is bound for a recession, if it has not already fallen into one.

"The ISM manufacturing index is now in the no-man's land between weak growth and recession, but the problems elsewhere in the economy point more to the latter," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

According to another report, help-wanted postings on major U.S.-based Internet job boards rose 16.8 percent in February, showing an expected post-holiday seasonal rise.

The Conference Board said its measure of the total number of unduplicated online jobs rose to nearly 3.93 million in February from about 3.36 million in January.