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Friday, July 14, 2006 - Page updated at 12:00 AM

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Brace for $80-a-barrel oil

The Associated Press

WASHINGTON — Oil's march toward $80 a barrel seems inevitable, with multiple paths to get there.

It could follow another flare-up of Middle East violence. Or a hurricane in the Gulf of Mexico. Or maybe a refinery snag is all it would take.

"Mother Nature, physical disruptions and the politics of the world. All of those tell you that the risks are toward the upside," said Larry Goldstein, president of the Petroleum Industry Research Foundation, a New York think tank financed by the industry.

Oil prices surged Thursday to a record near $77 a barrel in world markets agitated by the escalating Israel-Lebanon conflict and the threat of supply disruptions in the Middle East and beyond.

There is enough crude oil to meet daily demand of 85 million barrels a day, but it isn't just buyers of the physical commodity bidding up prices.

Hedge funds and other institutional investors are making big bets as a way to profit from global instability and to offset any losses the rest of their portfolios may sustain as a result.

"Oil has become a proxy for geopolitics right now," said Daniel Yergin, who heads Cambridge Energy Research Associates.

Yergin said petroleum supply-demand fundamentals are improving, with global oil inventories and spare-production capacity rising, but clearly not enough to offset the unrest.

The latest leap in oil has shaken the confidence of stock-market investors already fretting about higher interest rates and a slowing economy, though economists say most consumers and businesses appear to be absorbing higher energy costs surprisingly well.

U.S. gasoline demand continues to rise in spite of $3-a-gallon pump prices, core inflation remains relatively low and the U.S. economy, while cooling off, is still forecast to grow by roughly 3 percent in the second half of the year.

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"Two years ago, I might have said that $70 or $75 a barrel would be some kind of a tipping point. Now I'm not so sure anymore," said Nariman Behravesh, chief economist at Global Insight, a private forecasting firm.

Still, Behravesh said lower-income Americans are suffering disproportionately from higher energy costs.

"I could certainly make a policy case for helping them out on a temporary basis," he said.

Light sweet crude for August delivery shot up as high as $76.85 a barrel on the New York Mercantile Exchange before settling at $76.70, an increase of $1.75, or 2 percent.

The rally came as fighting between Israel and the militant group Hezbollah in Lebanon intensified, explosions hit Nigerian oil installations and a diplomatic standoff dragged on between the West and Iran over its nuclear program.

The previous Nymex settlement record of $75.19 was July 5. The previous intraday record of $75.78 was posted two days later. Adjusted for inflation, oil prices would need to rise to about $90 a barrel to exceed the highs set a quarter-century ago, when supplies tightened in the aftermath of a revolution in Iran and a war between Iraq and Iran.

Today, oil prices are being pushed higher by rising demand and worries that the world's limited supply cushion would not be adequate to offset a lengthy disruption to output in major producing countries, such as Iran or Nigeria.

There are also concerns about the risks hurricanes pose to U.S. production.

The latest fear being priced into the market is that the conflict between Israel and Lebanon could spill over into other corners of the Middle East, the region that produces nearly a third of the world's oil and contains almost two-thirds of its untapped reserves.

"It plays psychologically in people's minds," said think-tank chief Goldstein. "You don't have to hear them say it."

The surge in oil prices rattled investors, sending the Dow Jones industrials sharply lower for the second straight day.

Shares of Wal-Mart Stores, the world's largest retailer, slumped 2 percent on the New York Stock Exchange on concerns that high energy prices are cutting into consumers' discretionary income.

"The economy took $50 oil in stride," Yergin said. "It's clearly not taking $70 or $75 a barrel in stride. This is a rougher adjustment."

Critics say Congress has failed in its approach to deal with soaring energy costs because it has not given as much attention to curbing demand as it has to adding supplies, such as a hotly debated proposal to open part of the Arctic National Wildlife Refuge to oil drilling.

"We too often forget that the United States is far and away the biggest consumer of oil," said Tyson Slocum, an energy expert at Public Citizen, a Washington, D.C.-based consumer watchdog.

Slocum said the country needs to invest more in public transportation and to sharply increase automobile fuel-economy standards.

Copyright © 2006 The Seattle Times Company

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