NEW YORK, N.Y. - The price of oil has surged 12 per cent the past six weeks, pushed up by tensions with Iran, a cold snap in Europe and rising demand from developing nations.
The surge is hitting home. Oil is raising the price of gasoline for U.S. motorists. It's also making diesel and jet fuel costlier for shippers and travellers. That could crimp already modest growth in the economy.
"It's an additional burden on already burdened households." says Judith Dwarkin, Chief Energy Economist at ITG Investment Research.
Brent crude, used to price foreign oil imported by U.S. refineries, rose US$1.08 to $120.01 per barrel on Thursday. It's up 12 per cent so far this year and 15 per cent from a year ago. West Texas Intermediate, the U.S. benchmark, rose 52 cents to $102.32 on Thursday. It's up 21 per cent from a year ago.
The climb has been caused by fears that a military conflict will erupt in the Middle East and block oil supplies from reaching markets. The U.S. and Europe are tightening economic sanctions against Iran over what the West believes is Iran's attempt to build a nuclear bomb. World leaders fear Israel may be planning a strike against Iran.
In response, Iran, which is the world's third largest exporter, has threatened to withhold its own oil deliveries and to block the Strait of Hormuz, through which one-fifth of the world's oil flows.
While neither scenario is likely, it has prompted traders to buy oil as protection against a possible shortage. Phil Flynn, an analyst at PFG Best, says the Middle East tensions have added $20 per barrel to the oil price.
Also, a severe cold snap has gripped Central Europe this year, increasing demand for heating oil and helping push Brent prices higher. That in turn contributes to high gasoline prices in the U.S., since many refineries use Brent to make gasoline. Gas prices are up about 25 cents this year.
A 25-cent jump in gasoline prices, if sustained over a year, would cost the U.S. economy about $35 billion. That's only 0.2 per cent of the total U.S. economy, but economists say it's a meaningful amount, especially at a time when growth is so weak. The economy grew 2.8 per cent in the fourth quarter, a rate considered modest following a recession.
On Thursday, the U.S. government said weekly applications for jobless benefits fell for the fourth time in five weeks to the lowest point since March 2008. Lower unemployment could signal increased demand for oil. But U.S. oil demand fell last year, even during the second half when economic growth was stronger. Dwarkin expects it to fall again, both in the U.S. and in the rest of the developed world.
Instead, it is demand for oil in developing nations that is pushing up global demand, and prices.
Dwarkin expects demand to rise one million to 1.2 million barrels per day in developing countries in 2012. She thinks demand in developed countries will fall by 400,000 barrels per day. Together that would push global oil demand up slightly less than one per cent for the year.
Oil prices spiked at this time last year with uprisings in several Middle East nations, particularly Libya. Investors who worried about major disruptions in supplies bought oil and drove up the price. WTI rose from $85 a barrel to $114 in two and a half months. Brent rose to almost $130 a barrel. Economists say last year's sudden price rise hurt economic growth in the U.S. during the first half of the year.
In other energy trading Thursday, heating oil rose almost a penny to $3.20 per gallon and gasoline futures rose 2 cents to $3.02 per gallon.
Natural gas rose 12 cents, or 5 per cent, to $2.55 per 1,000 cubic feet after the Energy Department reported the nation's gas supplies fell more than analysts expected last week.
At the pump, the U.S. average for gasoline was unchanged at $3.52 a gallon.
Jonathan Fahey can be reached at http://twitter.com/JonathanFahey .