Oil closes above $80 per barrel for first time

— -- Oil closed above $80 a barrel for the first time in history Thursday, setting a record for a third-consecutive day as supply worries and refinery shutdowns lifted prices.

The price of a barrel of light, sweet crude for delivery in October rose 18 cents to $80.09. That's up 12% from a month ago and 25% higher than a year ago.

Oil futures fell for the first time in 10 sessions Friday. Light, sweet crude for October delivery fell 99 cents to settle at $79.10 a barrel on the New York Mercantile Exchange after rising earlier to $80.36, an intraday record.

Despite the gains, oil is still not at a record when adjusted for inflation. In January 1981, the average oil price was $92.91 in today's dollars, according to the government.

Drivers will likely see little impact on gasoline from the increased oil prices because demand drops at the end of the summer driving season, putting less strain on supplies. That will help temper the effect of higher oil prices on consumers and the broad economy, which today is much less energy-dependent than it was a few decades ago.

"Unless oil (prices) spill into the price of gas, people aren't going to get too upset about it," says Todd Clark, a trader at Nollenberger Capital.

Stock investors have largely ignored the oil increases, driving up stocks. The Dow Jones industrial average rose 133.23 points, or 1%, to 13,424.88 Thursday.

Brightening news from the credit markets has been enough to overpower concerns about higher oil prices, Hugh Johnson of Johnson Illington Advisors says.

But the higher oil prices will still be felt throughout the economy. Heating oil prices may be higher this winter, airfares could creep up and shipping costs could rise, squeezing small businesses and truckers.

Such increases are coming when the economy is already in a somewhat fragile spot, with a volatile financial market, continued credit concerns from subprime mortgage defaults and some evidence of a slower job market.

"A lot of forces are coming together," says Timothy Rogers, chief economist at Briefing.com. "I don't think it's going to provide the force for a recession, but that's the fear."

Oil supplies tightening

Behind the latest oil increase:

•Supplies. U.S. oil inventories have fallen 9% in the past 10 weeks to the lowest level since mid-January, heightening supply worries.

The inventory decline, in part, has come as current, or spot, prices of oil have risen above prices for long-term contracts.

That makes it more lucrative for oil holders to sell rather than hold onto their oil.

Global demand has also been strong, particularly in China and India, where rapidly growing economies are requiring more fuel.

•Weather. Continued threats of hurricanes and other bad weather hitting the nation's oil industry are also propping up prices.

Hurricane Humberto crashed ashore in Texas and Louisiana on Thursday, dropping heavy rains that led to flooding and power outages. The storm prompted the closure of the Houston Ship Channel Wednesday, a major thoroughfare for petroleum imports.

Refineries in the storm's path also reported problems. Valero was forced to shut down its refinery in Port Arthur, Texas, following a power outage. Although power was back on, it was unclear when production would be back online at the facility, which produces 325,000 barrels of oil products per day, spokesman Bill Day says.

There were "minor" disruptions in production at ExxonMobil's refinery in Beaumont, Texas, which produces 349,000 barrels per day, spokeswoman Prem Nair says.

Another storm, what the National Hurricane Center is calling Tropical Depression Eight, is brewing, leading to concern about further disruptions next week.

•Dollar. The dollar has fallen 5% in the last year to the lowest in nearly three years against a basket of major world currencies, according to the Federal Reserve. The dollar is at an all-time low against the euro.

Oil is traded internationally in dollars. A weaker dollar means oil needs to be priced higher for sellers abroad to maintain purchasing power.

The increased prices have come even though OPEC members earlier this week pledged to increase production by 500,000 barrels per day starting Nov. 1. But the move was seen by many as being too little, too late.

"I don't think that is going to make a heck of a lot of difference," says Tom Coleman, senior vice president at Moody's Investors Service who tracks oil companies. "People are not expecting that in and of itself to have a big impact."

But Coleman, A.G. Edwards energy analyst Eric Wittenauer and others say prices are unlikely to stay this high for long, barring political or weather-related incidents that greatly hurt production.

"It still looks as though supplies are sufficient at this point, and they don't justify the prices," he says, arguing prices could be in the mid-$60s in the next few months.

But others see risks that prices will go higher.

Without a significant rise in OPEC oil production, prices could rise to the "high $80s or even low $90s," analysts at Goldman Sachs said in a note to clients this week.

Drivers likely to be spared

Drivers should escape hefty jumps in gasoline prices despite oil price increases:

•Demand. After summer vacation season ends, demand for gasoline typically tapers off. Average daily demand for gasoline in the four weeks that ended Sept. 7 was 0.9% more than a year ago, the Energy Information Administration says. Usually, demand growth is about twice that.

"It's a much more subdued demand picture," says Tom Kloza, analyst at the Oil Price Information Service.

•Season. Federal regulations say gasoline stations can begin selling less-complicated and less-costly winter-blend gasoline on Sunday. Such fuel is easier to import.

•Ethanol. It's cheap because a flood of new plants mean there's plenty of it as demand for driving fuel begins to slow. Most ethanol is made from corn, and there's been a big jump in the corn crop, a robust supply that could keep ethanol prices down for months. Blended with gasoline, the cheaper ethanol pulls down the price of fuel.

But predictions about gas prices are fragile, given low supplies.

The USA had a 19.7-day supply of gasoline at current use rates, "a record low" since record-keeping began in 1991, according to the EIA. Still, EIA analysts said in a report Tuesday that they expect gas prices to fall through the end of 2007.

Even though people could escape record gasoline prices, many will get hit by high prices of diesel fuel and heating oil.

Diesel fuels locomotives, tractor-trailers and delivery trucks. Prices have been elevated by tight supplies and strong demand, and could rise further as oil prices move up.

At $2.924 a gallon, the average U.S. diesel price Monday was the highest in more than a year, according to the Energy Department.

The trucking industry is projected to spend a record $107 billion this year for fuel. That's up from last year's $94 billion, the previous record, according to spokeswoman Tiffany Wlazlowski of the American Trucking Associations, a trade group of 55 state trucking groups.

The ATA says fuel makes up 25% of operating costs for trucking firms. At one stop, long-haul drivers easily spend more than $600 to fill their 200-gallon tanks.

Trucking businesses mitigate some of their high fuel costs through surcharges. Nonetheless, soaring fuel has led to the failure of 2,000 to 4,000 trucking companies each year since 2000, according to the ATA and Donald Broughton, an analyst at A.G. Edwards.

Watching every penny

At Craig Transportation, a small trucking firm run by four generations of family members in Perrysburg, Ohio, the uncertain economy and rising fuel costs make each year unpredictable. A few years back, the firm had a money-losing year and sold 60 trucks after the Sept. 11 terrorist attacks and recession, says President Lance Craig.

This year, though, Craig Transportation is enjoying 12% sales growth from last year. But fuel prices, slim margins for profit and an unpredictable fall season make Craig nervous.

"It doesn't take much to shut you down," Craig says. "The higher fuel costs can mean the difference between being in or out of business. We're watching every penny."

Corey Coffin, a 37-year-old independent truck driver who owns and maintains a big rig called "Betsy," says that about half his costs go to fuel. Today, he's hauling 25 tons of rocks from Baltimore to Houston. If he's lucky, he'll clear $2,000 after fuel, highway tolls, trucking permits, insurance and other rising costs.

"It's killing me," says Coffin, who's based in Oshkosh, Wis. "I used to run all 48 states, but I can't afford the fuel going out there."

The higher transportation costs are showing up in shipping charges.

UPS earlier this month raised its fuel surcharge for ground deliveries from 4.5% to 4.75%. The international surcharge rose from 14% to 14.5%. Automakers have boosted delivery charges this year on some vehicles. Toyota, for example, raised the charge $40 to $685 on 2008 models, in part because of higher diesel prices.

Heating oil, used by about 8% of households, will run $2.78 per gallon this winter, up 30 cents from a year ago, the EIA said this week, citing higher oil prices and tight supplies.

Most people don't have big enough tanks to buy a winter's worth of oil at summer prices and have to refill several times during heating season when demand is highest, EIA notes, so "rising or spiking prices are a concern."

Mark Wolfe, executive director of the National Energy Assistance Directors Association, says higher prices could mean hundreds of dollars more in heating oil costs for families this year, depending on how cold it is. "We're looking at another volatile winter," he says.

Airlines to feel the pinch

Though $80 fuel has yet to push airline price setters into panic mode, analysts such as JPMorgan's Jamie Baker say they expect continued upward pressure on fares.

That's especially the case because fare trendsetter Southwest is faced with diminishing cost savings from its fuel hedging program and the likelihood of higher costs once it completes a new labor talks.

As the USA's leading discount carrier, Southwest plays a pivotal role in whether other airlines can raise their prices. Because it typically is the lowest-priced carrier in any market it serves, when Southwest pushes fares higher, nearly all other carriers follow.

Southwest pushed through a general fare increase just after Labor Day, and Baker says he expects Southwest to do it again, most likely sometime around Thanksgiving.

But it could be worse. Two years ago, the sudden jump in oil prices after Hurricanes Katrina and Rita was a huge surprise to carriers, which had no choice but to pay top dollar for jet fuel.

Today, analyst Ben Brockwell at the Oil Price Information Service says airlines are doing a better job of managing their consumption and shifting where they buy the bulk of their fuel to take advantage of regional price differences. Most important, he says, "They're flying a whole bunch of much more fuel-efficient airplanes."

The Air Transport Association, the industry's primary trade group, notes that U.S. airlines carried 12% more passengers and 23% more cargo in 2006 than in 2000 but burned 3.5% less fuel.

Contributing: James R. Healey, Edward Iwata, Dan Reed and Matt Krantz; Associated Press