Oil Prices Again a Source of Worry

How long can the economy sustain shocks from the price of oil before we see real damage? How long, for example, before an upsurge in inflation or a downtick in GDP?

Oil prices crossed the $49-a-barrel mark for the first time in trading Friday morning on the New York Mercantile Exchange. That was above Thursday's closing price of $48.70, which was the highest NYMEX settlement on record. Oil prices are now up 57 percent in the past 12 months. Still, when the price is adjusted for inflation, oil is still roughly $8 less per barrel than it was leading up to the first Gulf War, the Associated Press reported.

Instability in Iraq appears to bear a large part of the blame for the increase. Traders reportedly spent much of the day Friday glued to TV screens showing developments in that country, with each conciliatory move between rebels and U.S.-led forces causing the price to go down, and vice versa.

"The Iraqi situation seems up in the air every day," said Tom Bentz, a trader at BNP Paribas Futures in New York, according to AP.

However, the key factor driving the demand side of the equation is the booming worldwide economy, which the rising cost of energy threatens to derail. Organization of Petroleum Exporting Countries (OPEC), which account for about one-third of all oil supply, are pumping at capacity. One area of concern has been Venezuela, where president Hugo Chavez survived a recall attempt and avoided unrest in the country. Another trouble spot is Russia, where Yukos, the country’s largest oil exporter, teeters on bankruptcy.

According to the AP, some traders have already started to speak in hushed tones about the possibility of $60 per barrel if events in Iraq and in other oil-producing countries go badly. The whisperings came even as OPEC president Purnomo Yusgiantoro made comments about "a significant outcomeÂ…to overcome this big problem [of rising oil prices]” from its next meeting in September.

In the meantime, the U.S. economy is still proving resilient enough to “withstand the latest oil price shock,” said Moody’s Investors Service’s John Lonski.

Lonski points to last week’s announcement by the Philadelphia Federal Reserve Bank District that its index of manufacturing activity fell from July's extraordinarily robust +36.1 to August's still vibrant +28.5, which matched its average of the 12 months ended July 1, 2004.

“On balance, August's Philly Fed index implies that sharply higher crude oil prices have yet to stall the U.S. economy,” he said.