Oil prices rise behind belief that recovery is near

Once again it's time to start pushing the bicycle pedal instead of the gas pedal, working more from home, and possibly locking in a price for the heating oil you'll need this winter.

Oil prices are spouting, fueled, in part, by investor exuberance over speculation that the start of an economic recovery could be just months away.

The price of crude oil rose nearly 2 percent yesterday to $72.68 a barrel, a high for the year and up from below $35 in March.

Gasoline is also on its own climb, surpassing $2 a gallon on the futures market for the first time since October. At the pumps yesterday, the average price for regular unleaded gasoline in Philadelphia and the four surrounding Pennsylvania counties was $2.63 a gallon - the national average, according to AAA Mid-Atlantic. In South Jersey, the average price was $2.44.

But it's oil that's stealing the show on Wall Street, in turn causing consternation on Main Street, and there are a variety of reasons for that.

Exactly when the already monthslong oil price gusher will be capped is unknown. That's because the current oil valuation is "not based on economic reality," said Stephen Schork, an energy-prices analyst from Villanova and editor of The Schork Report, a subscription newsletter on the energy markets. "We have a market that is now trading on perception."

The perception is that even though U.S. unemployment reached 9.4 percent in May and home values remain depressed, there are rumblings of a recovery, said Shawkat Hammoudeh, professor of economics and international business at Drexel University's LeBow College of Business.

Contributing to that view is a stock market that has experienced largely consistent gains since early March.

"The oil prices are getting clues from the stock market about recovery, and the stock market usually predicts recovery within five months," Hammoudeh said. "According to the stock market, we should have a recovery starting in September."

The weakening dollar is also heavily influencing the rising oil prices, said Brian Milne, refined fuels editor for Telvent DTN, a commodity-information provider based in Omaha, Neb.

Because crude oil trades internationally in U.S. dollars, the weaker the dollar, the stronger the price of oil, Milne said. The weakening dollar also triggers concern about inflation, he said, causing investors to flock to commodities, considered a reliable bet.

Reports of dropping crude-oil inventory and rising fuel consumption are also leading investors to conclude that an economic rebound is imminent.

Milne cited a report by the U.S. Energy Information Administration that U.S. crude inventories dropped 4.4 million barrels last week, far more than market expectations.

Drexel's Hammoudeh cited a June report by the International Energy Agency, the monitoring arm of the 30-nation Organization for Economic Cooperation and Development, that estimated global oil demand to be 83.3 million barrels a day this year. That was up from 83.18 million barrels in IEA's May report. Hammoudeh said cancellation of oil-investment projects would delay the deployment of six million barrels per day of oil capacity, rendering supply "not as good as people thought."

That, along with increasing demand from China and India, could keep prices rising, Hammoudeh said. He is projecting that per-barrel prices will reach $200 within four years. Add a major crisis in, for instance, Saudi Arabia, that causes two to four million barrels a day to be pulled from supply lines, and prices could reach $250, said Lester Lave, professor of economics at the Tepper School of Business at Carnegie Mellon in Pittsburgh.

As oil prices go, so go product prices - about 60 to 90 days later at K'NEX Brands L.P., in Hatfield, said Michael Araten, president and chief executive officer.

K'NEX makes highly durable plastic toys and also is a high-injection molder for a variety of industries, including pharmaceutical and construction. Petroleum is a key component of all of K'NEX's plastic products.

Although gasoline prices are well below where they were last year at this time - $4.04 a gallon for regular unleaded in Pennsylvania, $3.97 in New Jersey - they are showing signs of influencing commuting patterns.

At Drexel, students and faculty are opting to take and conduct more online courses to cut down on travel expenses, Hammoudeh said.

Although his ride from Merion Station to Drexel's campus is only 17 miles, Hammoudeh said the likelihood that oil and gasoline prices will continue on their upward trajectory has him starting to think about replacing his Mercedes Z280: "If I buy a new car, I'll think of a hybrid."

In that regard, speculators driving up those prices, said Carnegie Mellon's Lave, "are saving us from ourselves."