Wall Street horrified over peak oil and renames it ‘Super Spike

NEW YORK, March 31 (Reuters) – If oil were to hit $105 per barrel, as suggested by a leading broker, it would spread ruin through the stock market and could spell disaster for everything from airlines to retailers to mining companies, analysts said on Thursday.

RPT-Oil super-spike could sink stocks, economy-analysts
Thu Mar 31, 2005 03:14 PM ET
(Repeats to widen distribution)
By Patrick Fitzgibbons

Since the start of the year, oil has risen more than 25 percent to near $56 a barrel. On Thursday, Goldman Sachs issued research saying oil markets have entered a “super-spike” period that could see prices go as high as $105.

Goldman also raised its 2005 and 2006 New York Mercantile Exchange crude price forecasts to $50 and $55, respectively, from $41 and $40. A Reuters poll showed that analysts on average expected a mean price for 2005 of $45.49 a barrel.

The analysts revised their super-spike range to $50-$105 per barrel from $50-$80 previously, noting demand and economic growth in the United States and China especially.

While oil companies benefit from rising crude prices, a diverse mix of companies including Delta Airlines (DAL.N: Quote, Profile, Research) , Continental Airlines (CAL.N: Quote, Profile, Research) , trash company Allied Waste (AW.N: Quote, Profile, Research) , rail operator Burlington Northern Sata Fe Corp. (BNI.N: Quote, Profile, Research) and Kellogg Co. (K.N: Quote, Profile, Research) have all warned of fuel costs.

Airline industry analyst Robert Mann said the consequences of oil reaching $105 would be so disastrous to the U.S. economy that it is difficult to isolate the airline industry within that scenario.

“It’s bigger than that,” he said. “I think it would ruin the economy. It would be catastrophic.”

However, Tom Bentz, an analyst at BNP Paribas Commodity Futures Inc., said $100 oil “is possible, but anything is possible.

“With OPEC (Organization of Petroleum Exporting Countries) capacity only a million (barrels per day) away from their limits and demand rising, add a major outage somewhere and sure it’s possible,” he said.

David Healy, auto analyst at Burnham Securities, said oil at that level would probably translate into a $1.21 per gallon hike in U.S. gasoline prices. Gasoline prices at the pumps are already running at a record average over $2.10 a gallon.

“For the high-income guy it’s probably not going to make any difference in his buying or driving habits,” Healy said. “If you raise gasoline prices that much you’re putting a tax on the lower-income people … it’s like a huge regressive tax on low-income people.”

For airlines and other transport companies, the effects of higher oil are easily understood. For other sectors, though, it will also have an enormous effect.

“If crude hit $105 it would not be good (for mining),” said Victor Flores, senior mining and gold analyst at HSBC Securities. “Fuel or energy costs are 25 percent of costs in some operations.”

The average spot price for gold last year was around $415 per ounce. Flores noted the average cost of mining that gold was $240 per ounce.

POWER PLAYS

The effect record-high oil prices would have on the power industry would be felt through similarly high prices for natural gas, which tends to rise and fall with oil.

Sanford Bernstein analyst Hugh Wynne said that power prices would likely surge in markets that depend heavily on natural gas for generation — including New England, New York, California, Texas, Florida and the West.

He said high gas prices would be nearly immediately felt in deregulated markets, where companies could be expected to rapidly pass higher costs to customers.

“In those states, the impact of this would be higher power prices for consumers and higher profits for any generator that doesn’t burn gas,” Wynne said. He noted that higher gas prices would likely boost earnings at companies with large amounts of nuclear and coal generation in those markets, including TXU Corp. (TXU.N: Quote, Profile, Research) , Dominion Resources Inc. (D.N: Quote, Profile, Research) , Constellation Energy Group Inc. (CEG.N: Quote, Profile, Research) and Entergy Corp. (ETR.N: Quote, Profile, Research)

Separately, George Pipas, the chief U.S. sales and market analyst at Ford Motor Co. (F.N: Quote, Profile, Research) , said a great deal depended on when oil hit $105, since new technologies could mute the impact.

He said it could be devastating. “Then you’ve got issues that go far beyond the cost of gasoline. You’ve got the makings of what potentially could be a global recession, or depression, and at that point how much it costs to drive is kind of moot,” he said.

ECONOMIC TUMULT

“If prices stayed north of $75 per barrel for more than a few months, the U.S. economy would likely slide into recession, which actually would make it unlikely it would get over $100,” said Mark Zandi, chief economist for Economy.com. “I think the economy would break before we got to $100 oil.”

Those oil levels could also spell trouble for the overheated housing markets and, to a lesser degree, the commercial real estate market, where prices have been escalating by double digits.

At the end of the scale, higher oil costs would also limit the amount consumers spend on everything else.

“It would have a disastrous impact on consumer spending. (People) would not be able to spend as freely as they like,” said Kurt Barnard, president of Barnard’s Retail Consulting Group. “Unless your salary is increased commensurately, you certainly will have a lot less money left in your pocket after you fill the tank.” (Reporting by Michael Erman, Ilaina Jonas, Mark Weinraub, Steve James, Richard Valdmanis, Deepa Babington, Kyle Peterson and Thomas Brown)

http://www.reuters.com/financeNewsArticle.jhtml?type=bondsNews&storyID=8053108