Sheila McNulty Rising petrol prices: good for the oil industry, but bad for its PR

The rise in US crude oil prices has been pushing petrol up toward $4 a gallon – a level analysts note has historically led to a drop in consumer demand. The current national average price of petrol is just under there, according to the Daily Fuel Gauge Report by AAA, America’s largest motoring and leisure travel membership organization.

John Felmy, economist at the American Petroleum Institute, the national industry trade association, said the last time crude oil prices were hitting these levels – in 2008 – consumer demand for petrol began dropping around the $2.80 per gallon level. The bigger declines were when gasoline rose above $3.75 a gallon, he said.

But 2008 was not just a time of rising prices but also global recession. Now the economy is recovering, and it is growing demand, in addition to a decline in supplies, that is pushing up prices, analysts say.

They note crude oil prices were rising even before tensions spilled over in north Africa and the Middle East.  David Frankel, associate professor of economics at Iowa State University, says:

It doesn’t seem enough oil is at risk right now to cause a global recession.

Yet there is no doubt rising petrol prices are being noticed by the public, said Joseph Stanislaw, a senior adviser for Deloitte, the consultancy.

Given that petrol stocks are below the five-year average for this time of year, Darin Newsom, senior analyst in the energy trading division of Telvent DTN, the global business information services provider, expects $4 a gallon petrol as early as the end of May.

Rex Tillerson, chief executive of ExxonMobil, the world’s biggest international oil company, said the last time US petrol prices hit $4 a gallon, it had an economic and psychological effect: People began to ride more frequently on public transportation, carpool and cut back on discretionary driving. In his words:

I don’t know if that tipover is at the same $4 level or not. I just know that when we went through that the last time, $4 was like a significant emotional event for a lot of people.

All this could add up to good news for oil companies. Not only in profits but in access to resources.

Charles Swanson, Houston office managing partner at  Ernst & Young, the professional services firm, said higher prices will influence debate about developing the Gulf of Mexico:

Nothing causes people to change their view of things more than when they are having a hard time making ends meet. We are approaching $4 a gallon for gasoline. If that doesn’t do it, will $5? At some point people will say we’ve got to drill [full on] in the Gulf of Mexico.

That could well be true. And while it would be a benefit in the long run, it might well hurt the companies’ PR. Indeed, Washington already is reacting to stellar quarterly financial results across the oil industry with talk of cutting tax breaks for the industry.