Oil Spike: A Surmountable Challenge? ; the Politics of the Middle East Are So Incendiary That Energy Analysts Are Not Sure How High Prices Will Rise

Article excerpt

The escalation of violence in the Middle East is reverberating on Wall Street and Main Street - although many analysts still expect the US economy to grow this year.

Last week, the stock market lost 351 points, or 3.2 percent, and the Dow Jones Industrial Average edged closer to being negative for the year. The price of oil rose to a noninflation-adjusted record level of $76.95 per barrel, up almost $3 a barrel for the week.

The higher crude oil prices will probably mean higher prices at the pump - possibly as much as 20 to 25 cents a gallon.

The politics of the region are so incendiary that energy analysts are not sure how high oil prices will rise. Is $80-a-barrel oil the next stop, or could it race to $90?

"The whole area is a seething caldron of potential explosions," says Richard McCormack, a former undersecretary of State for economic affairs, now a senior adviser at the Center for Strategic and International Studies in Washington. "Seventy-dollar-a-barrel oil could look cheap."

Despite the uncertainty, many economists say it's too early to predict a slide into recession. Most are sticking to an expectation that US economic growth will slow to an annualized rate of 2-1/2 percent, a tepid pace that should ease the Federal Reserve's concerns about inflation.

"It will take more than higher gasoline prices to push us into a recession," says David Wyss, chief economist at Standard & Poor's in New York. "It's amazing how little impact the rising prices have had."

Nevertheless, as the tensions in the Middle East rise, Wall Street is full of scenarios - few of them positive.

"There is now an additional risk factor: The war could widen, or Iran could use oil as a lever over the West," says Robert Hormats, vice chairman of Goldman Sachs International in New York.

If Israel expands its bombing to include Syria, "it opens up a whole different set of dimensions" such as the involvement of Iran, Mr. Hormats says. The Iranians have said they will take action if Syria is attacked, he says. "You could see an attack on a ship or oil facility in the region. It's a very vulnerable part of the world's infrastructure."

If Iran were to pull out of the oil market, Standard & Poor's estimates that oil could jump to $90 a barrel, says Mr. Wyss. If Iran tries to close the Strait of Hormuz, he says, "you are talking $150 a barrel."

GDP is different now

The last time uncertainty surrounded Iranian oil was after US Embassy employees were taken prisoner in Tehran in 1979. Oil prices started climbing sharply, and supply disruptions occurred. …


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