WIRE:03/14/2000 14:33:00 ET Oil prices: Brave new world, or 1970's revisited

NEW YORK (Reuters) - Does the return of bellbottoms, the Beetles, and OPEC on the front pages herald the return of odd-even gas days -- last seen during the 1970's -- during this summer's driving season? And next winter, will residents of the world's largest heating oil market -- the U.S. Northeast -- huddle in two sweaters and worry about how to pay mounting fuel bills?

Highly unlikely, as experts agree that the world today is a different place than it was when two successive episodes of soaring oil prices, in 1973 and 1978, plunged the United States into a long-lasting recession.

The current oil price rise to nine-year highs is distinct from previous shocks because it marks a recovery from historical lows set last December, according to economics professor James Hamilton, of the University of California at San Diego.

"A weak world economy caused the oil price to go down, and a strong world economy is helping it come up," said Hamilton. "This is not the same kind of negative signals as the previous oil shocks, which were caused generally by military conflict or genuine shortness of supply."

Oil prices have tripled over the past year as production cutbacks by members of the Organization of Petroleum Exporting Countries (OPEC) and other oil producers have cut four million barrels per day (bpd) off the 75 million bpd world market.

TODAY'S U.S. ECONOMY LESS DEPENDENT ON OIL

Experts, including officials of the Federal Reserve, agree the U.S. economy is much less sensitive to high oil prices than it was in the 1970's because the economy is less dependent on oil.

"Energy accounts only about half of what it used to in the nation's productivity, so any effect of an oil spike would be muted," said Professor Steven Davis of the University of Chicago Business School.

In Texas, the heart of the U.S. oil patch, oil now accounts for about seven percent of the economy -- down from 20 percent after the boom or bust cycle of the 1970's and 1980's pushed the Lone Star state to diversify its economy into high technology.

WILL HIGHER GASOLINE PRICES CHANGE BUYING PATTERNS?

Gasoline prices, which keep hitting new weekly highs, could go over $2 a gallon this summer, according to some analysts.

"Worst case scenario, gasoline at the pumps hits $2.50 a gallon this summer, best case it's $2.00," said Phillip Verleger, an oil analyst with PKV LLC in California.

A cold snap earlier this winter combined with low inventories of heating oil caused refineries to maximize production of that product instead of starting to produce gasoline.

As a result, gasoline stocks have suffered during a time of year when supplies normally pile up ahead of the start of the driving season on Memorial Day at the end of May.

So far, the hike in oil prices has not resulted in a measurable change in U.S. demand for petroleum products nor in car sales.

February car sales were the 11.8 percent higher over last year -- the second highest ever. Even dealers in Sports Utilities Vehicles (SUVs), which are notorious gas guzzlers, are selling briskly.

"I haven't seen any change in the buying pattern of the consumer," John McClellan, sales manager at Varsity Ford in Ann Arbor, Michigan, told Reuters, adding he cannot keep enough Excursions in stock.

TRANSPORT COMPANIES HIT BY SOARING FUEL PRICES

Trucking and freight companies are particularly vulnerable to high oil prices since they are low margin businesses and fuel is the lion's share of their costs.

Because diesel fuel is closely akin to heating oil, the 132 percent rise in heating oil in February caused some truckers to park their trucks.

"Transportation is a big user of petroleum products, so any big increase like this has a negative effect on all of the transportation industries, probably trucking and air more than rail," said Michael Babcock, professor of economics at Kansas State University.

Some of the bigger transportation carriers such as Federal Express Corp. and United Parcel Service Inc., have used hedging -- buying ahead large amounts of fuel at a set price -- to avoid price fluctuations.

But unless the hedging techniques used are particularly sophisticated, they really don't work, according to Tom Kloza, chief oil analyst at New Jersey-based Oil Price Information Service (OPIS).

Regardless of hedging, Federal Express imposed a three percent fuel charge to most domestic and international services as of February 1. And as a result, it is the end user who ends up paying.

AIRLINES NOW BETTER ABLE TO COPE WITH HIGH FUEL PRICES

Although jet fuel prices are hovering at highs not seen since the Gulf War, fuel efficient aircraft, strong balance sheets, and a strong economy all favor the airlines.

While jet fuel prices -- the airlines' second largest expense after labor -- are expected to add billions of dollars to industry costs in 2000, few analysts expect the financial chaos seen in the early 1990's.

Rising fuel costs are expected to add $4.4 billion to industry costs in 2000 and that assumes the fuel prices will come down in the second half of the year, according to David Swierenga, chief economist with the Air Transport Association, an industry trade group.

Airlines have also passed along higher costs by raising airfares and instituting fuel surcharges to cover their costs.

IMMINENT END OF PRODUCER'S PACT SEND PRICES DOWN

On March 27, the 11 members of OPEC will meet in Vienna along with other oil producers including Mexico and Norway to decide how much oil they will unleash on the market.

Signals from the main OPEC producers indicate that leading producers want any extra supply produced from April unofficially to come on top of current leakage, now estimated at between 1.2 and 1.4 million bpd.

Outside OPEC, Mexico is expected to no longer restrain output at all, adding a further 300,000 bpd, although nothing is official yet.

The International Energy Agency (IEA), the west's industry watchdog, estimated last week that the world needs a rapid rise of 2.3 million barrels per day to rebuild low inventories.

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-- Martin Thompson (mthom1927@aol.com), March 15, 2000