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Businesses feel the fuel pinch

From Wall Street to Main Street, investors watched global oil markets yesterday as the price of crude flirted with the $100-per-barrel milestone, raising the prospect of higher costs for everything from gasoline to groceries.

Analysts say this year's steady climb has been propelled by a volatile mixture of tight world supplies, a weakening dollar and speculative trading, which many say has distorted the market and created a price bubble poised to burst. Barring a drastic reversal, forecasters say consumers can expect to see gasoline prices set a record in coming weeks, potentially taking the cost of other goods and services along for the ride.

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Maryland business owners say they are caught in the middle, with their costs rising at the same time consumers are cutting spending to deal with their own budget pressures.

"I can't figure out why more people aren't in an uproar over it," said George Boudouris, owner of George's Moving in Baltimore. His trucks use diesel, which is $3.50 per gallon and rising.

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Light, sweet crude touched a record $98.62 per barrel yesterday morning before settling back to $96.37 after a government report showed that oil inventories fell less than analysts expected last week. The record was reached in a volatile day of trading, which saw the Dow Jones industrial average fall more than 360 points amid concerns about the weakening dollar and continued credit concerns.

Meanwhile, gasoline prices climbed to an average $2.954 per gallon in Maryland, up 26 cents in the past month, according to AAA. Compared with a year ago, gas is up almost 82 cents, or nearly 40 percent. The U.S. Energy Information Administration predicted yesterday that average gas prices nationwide will stay above $2.90 per gallon through year's end and will set a record average of $3.235 by May. Other analysts see it going to $3.50 per gallon or more if oil stays close to the $100 per barrel marker.

"The whole planet is using oil just about as soon as it gets out of the ground, and so a small problem can have big price effects," said Thomas Firey, a senior fellow at the Maryland Public Policy Institute.

The latest run-up has conjured memories of the 1970s and 1980s energy crises, when high oil prices dragged down the economy and led to recession combined with high inflation. Analysts say the current price per barrel is dangerously close to the inflation-adjusted high reached in April 1981. Depending on whom you ask, oil has to hit about $101.70 per barrel to match that peak.

Analysts say that so far, the economy is holding steady, avoiding a recession despite oil's climb from $55 per barrel at the start of the year. The economy surprised analysts by growing at the robust pace of 3.9 percent in the third quarter.

Overall, the economy is far better equipped to handle higher energy prices today than it was 30 years ago. Energy takes up a smaller percentage of household income than it did back then, and industry uses half as much energy to produce the same amount of economic activity.

"Nobody is expecting that this surge in gasoline prices is going to affect our consumption to the extent it could trigger a recession," said Kajal Lahiri, a professor of economics at the State University of New York at Albany.

Still, Maryland business owners say their costs are rising and profits are falling. Something has to give, and over time that typically translates into higher prices for consumers.

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"It's squeezing our profits, absolutely," said Chris Psoras, owner of Flowers by Chris in Baltimore.

Psoras said her accountant told her yesterday that the shop's finances were getting tight as a result of rising costs. The florist has flowers shipped in from as far as the Netherlands and South America and creates custom arrangements that are often delivered by truck. Even when she buys from local wholesalers, Psoras is hit with transportation surcharges as a result of the fuel increases.

"The prices are just going up, up, up," she said. So far, she has resisted raising prices heading into the busy holiday season, which means the added costs come out of her pocket.

Marc Komins, co-owner and executive vice president of Superior Tours, a Pikesville business that offers daily bus trips to New York and Atlantic City as well as chartered trips across the country, said diesel fuel used to be cheaper than the lowest grade of unleaded gasoline. Now it's more expensive than the highest grade. At $3.50 a gallon, filling up one of the company's 200-gallon tanks costs $700.

"We're holding our prices, but fuel surcharges might not be far off," he said.

Komins hopes it won't hurt business, which is normally brisk around the holiday season because people want to see the Christmas decorations and go shopping in New York.

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"On the other hand, it may be a help," he said. "Since gas has gone up so high, people may be more inclined to take the bus because it's a cheaper way to get there."

Maryland manufacturers have struggled with rising electricity and natural gas prices, which have gone up by double-digit percentages in recent years. Now oil is becoming a bigger concern.

Susan J. Ganz, chief executive of Owings Mills-based Lion Bros., which makes embroidered emblems and logos, said her company is seeing "significant" increases in raw material costs because petroleum is an important part of synthetic threads and fabrics. The oil situation is also to blame for the 15 percent to 20 percent surcharge Lion Bros. is paying to ship goods by air. And it has to shell out more to cover its sales force's travel expenses.

She figures it's as much as 10 percent more expensive to do business now than it was a year ago, and oil is a key reason.

"We see it affecting everything we do in an inflationary way," Ganz said.

The frustrating thing about the latest run-up in oil prices is that most analysts don't see an immediate supply problem. Consumers typically drive less during the winter, and refiners are no longer under pressure to produce special summer blends of gasoline to meet regional clean air standards.

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But energy traders often operate with hair-trigger reactions - ready to pounce on any news that might signal a potential supply disruption. Fears of a military conflict between the United States and Iran, speculation that Turkish forces might enter Iraq to oust Kurdish rebels, and other anxieties have all contributed to recent price swings. Most analysts say the market is one crisis away from oil at $150 per barrel.

"There's no supply you can just turn on to make up for a disruption," said Stephen Brown, director of energy economics at the Federal Reserve Bank of Dallas.

Some blame the traders themselves. Investors from hedge funds to banks are pouring money into unregulated oil futures markets, which industry officials often refer to as "dark markets" because they lack oversight.

"It just so happens that these kinds of futures contracts can be manipulated if nobody is watching," said Michael Greenburger, an expert on futures markets at the University of Maryland School of Law in Baltimore.

paul.adams@baltsun.com jamie.smith.hopkins@baltsun.com


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