Published Saturday, September 16, 2000, in the San Jose Mercury News

Oil-price shocks could still bruise high-tech economy BY MATT MARSHALL Mercury News A dangerous monster could be lying in wait outside the door of the nation's booming high-tech economy.

That fear was haunting economists and investors after crude oil prices spiked 6 percent Friday to a 10-year high of $36 a barrel -- 43 percent higher than at the beginning of the year.

Rising oil prices are already starting to pinch the budgets of households and companies around the world, slowing other spending and threatening to throw the brakes on economic expansion.

Bay Area consumers saw gasoline prices at the pump creep to new highs Friday, reaching $2.06 in San Francisco and $1.97 in San Jose -- up more than 40 cents a gallon from a year ago. And the nation's major airlines jacked up round-trip ticket prices this week by $20, the second such increase this year, blaming the hikes on higher oil prices.

Although so far corporate profits remain strong, economists say that Silicon Valley's high-tech companies could soon see an impact on their bottom lines. Economists worry that high oil prices -- especially on top of the Federal Reserve's recent rate hikes -- could slow the global economy, reducing the world's seemingly insatiable demand for chips, routers and software.

After shrugging off oil prices for months, investors have finally begun to take notice. On Friday, they sold off shares in Old Economy and New Economy companies alike. The tech-heavy Nasdaq composite index dropped 78.63, or 2.02 percent, to 3,835.23. The Dow Jones industrial average fell 160.47, or 1.44 percent, to 10,927.

``Looking at the data, it's obvious to me that the economy is slowing,'' said Gus Richard, a portfolio manager for the Emerging Growth Management Co. in San Francisco. Richard has rotated his investments over the last few months, investing in oil and utility companies that are likely to profit from the higher energy prices. He is dropping holdings in some high-tech shares, he said.

`Much less a factor'

Still, some economists cautioned that the negative effects of an oil shock shouldn't be exaggerated. Faced with higher energy costs, Old Economy companies could be forced to upgrade their investments in technology as they seek to increase their overall efficiency.

``Energy intensiveness in production has declined over time, and it is much less a factor in our economy than it was 10 or 20 years ago,'' said John Ryding, senior economist at Bear Stearns & Co. Inc. in New York.

In fact, President Clinton said Friday that he doesn't think the nation faces a recession because of high energy prices.

But many economists say the United States can avoid the effects of higher energy prices for only so long, and things could become more ominous this winter if oil prices increase further.

On Tuesday, Ali Rodriguez, president of the Organization of Petroleum Exporting Countries, warned of a global energy crisis, saying that OPEC is quickly running out of production capacity. He said the price for oil could rise to $40 a barrel, ``depending on the winter.''

Other analysts say that a cold winter could bring prices to as high as $50, in which case several Asian countries could be thrown into a recession. Economists at Morgan Stanley Dean Witter estimate that oil prices will trim 1.2 percentage points from economic growth in Asia this year.

Exports of chip components by companies like Applied Materials of Santa Clara and Lam Research of Fremont would be crimped by an Asian slowdown, says Tia-min Pang, an analyst at S.G. Cowen & Co. who follows the chip equipment sector.

Asian economies are much less energy-efficient than the United States, he said, and they are expected to suffer badly if oil prices rise further. ``As the cost of manufacturing increases, they're going to have to cut back on investments,'' said Pang. That would mean fewer purchases of U.S.-made equipment for those factories.

Sung Won Sohn, chief economist at Wells Fargo Bank, said that every $10 increase in the price of a barrel of oil amounts to a 1 percent tax on consumer take-home pay.

The impact is subtle but significant. For example, said Sohn, businesses and consumers might decide to use their personal computers for another six months instead of upgrading them.

``If you have to spend more of your budget on energy -- whether you're a country, a company or a person -- you're going to have less money for high-tech kinds of products,'' said money manager Richard.

A slowdown could hurt dot-com companies that depend on growth in consumer spending, he explained, sparking a ripple effect.

Despite a decision by OPEC last weekend to boost oil production by some 800,000 barrels a day, prices have continued to increase rapidly.

Asian slump of '98

Experts say that the Asian economic slowdown in 1998 caused demand for crude oil to taper off significantly and prices to plunge, dissuading oil companies from looking for new supplies and building new refineries.

Since then, robust global growth and an Asian economic revival has driven up demand for oil faster than new supplies can be tapped.

Besides the impact of higher oil prices, there were other signs Friday that the U.S. economy might be slowing. Consumer prices dropped in August for the first time in more than 14 years, suggesting that demand for consumer products has cooled.

Meanwhile, shares of Oracle Corp. sank $6.63 to $78.31 after the software company beat earnings estimates but reported that sales for application software were slower than analysts expected. The Redwood Shores tech titan is seen as a key indicator of how the broader high-tech sector is performing.

Ed Yardeni, chief economist at Deutsche Bank Securities, predicts market forces will soon resolve the oil supply shortfall, as OPEC countries step up production to take advantage of higher prices.

In the meantime, however, he worries that the market is ``twitching and nervous'' and that energy prices could slow things down enough so that the high valuations of technology stocks aren't warranted. ``Let's face it. It's going to be tougher.''

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-- Martin Thompson (mthom1927@aol.com), September 16, 2000