Foreign Correspondence

[Amaunet]

An oil slick on wall street
A weak jobs report adds to increased uncertainty over oil supplies



Putin, I think, is not only pursuing a personal crusade against Yukos. This is a means to remind ‘others’ that he is capable of manipulating the price of oil with its ensuing ramifications.

-Am


By Matthew Benjamin

It's turning into a summer of discontent on Wall Street. Rocketing oil prices and anemic job gains delivered a one-two punch last week that unnerved financial markets and left the White House scrambling to put a sunny spin on current economic conditions.

The double blows are closely related. "The price of oil has disrupted the smooth transition from economic stimulus to job and wage gains," says Commerzbank Securities chief economist Robert Gay.

The possibility that the economy's "soft patch" is spreading sent the Dow Jones industrial average down 3.2 percent for the week ending August 6. That left it below the psychologically important 10,000 mark. The technology-laden Nasdaq composite dropped 5.8 percent. Worries that higher oil prices will crimp corporate earnings exacerbated fears already heightened by warnings of terror plots against financial institutions in Washington, New York, and Newark, N.J.

Tight market. Though economists are still trying to unravel the job numbers, which came in far below expectations, rapidly rising oil prices, which reached a record-high $44.77 a barrel for September delivery, were easier to explain, if not to resolve. The world petroleum market is as tight as, well, a drum. Thus every possible disruption, no matter how small, sends prices through the roof. "The cushion of spare capacity, usually very ample, is very small right now," says Jim Burkhard, director of global oil markets at Cambridge Energy Research Associates. He puts that cushion at about 1.8 percent of production, not nearly enough to prevent sharp price movements.

The latest disruption comes courtesy of Mother Russia, where last week authorities inexplicably threatened to kill the goose that daily lays them a golden, oil-filled egg. The Justice Ministry seized assets of oil giant Yukos in an attempt to collect billions of dollars in unpaid taxes. Such an action could take Yukos oil--which accounts for 2 percent of world supply--off the market for a week, or possibly much longer.

Although only Russian President Vladimir Putin seems to know what will happen to Yukos--many analysts suspect that he is pursuing a personal crusade against the company--the situation will probably be resolved in the near future. But don't breathe easy yet, cautions Philip Verleger, energy economist and senior fellow at the Institute for International Economics. "There's not enough refining capacity, demand is strong, and with a cold winter it could get ugly. We could see $50 a barrel by November."

That's bad news for the economy, as the higher cost of energy was behind weak consumer spending in June and poor July sales reports from major retail chains. High Frequency Economics says that every $10 increase in the price of a barrel of oil lowers its GDP growth expectations by six tenths of a percentage point. All of which feeds back into increased nervousness on Wall Street--and perhaps at 1600 Pennsylvania Avenue.

A Paucity of Jobs

Labor Department data showing just 32,000 new jobs added in July left economists, who generally expected some 200,000 more than that, scratching their heads. The increase was the smallest this year, a worrying fact considering that the economy is supposed to be gaining momentum. In fact, payrolls would have shown a loss in July were it not that job levels for June as well as May were revised down by 88,000 for the two-month period. Fewer than half of the 278 industries surveyed added jobs in July, down from 60 percent in June. The biggest disappointment was the service sector--long the bright light of job creation. It added just 14,000 new jobs, the fewest since August 2003. This may be an indication that productivity gains, which robbed manufacturing of so many positions over recent years, have finally spread to services. That could lead to a downsizing of expectations of how fast the economy will grow for the rest of the year.



http://www.usnews.com/usnews/issue/040816/biztech/16oil.htm