Thread: Get Ready for Still-Higher Energy Costs

Get Ready for Still-Higher Energy Costs
Saturday, October 20, 2007 6:37 AM EDT
The Associated Press
By JOHN WILEN and JOHN PORRETTO AP Business Writers
http://broadband.zoomtown.com

NEW YORK (AP) — Jim Ammons grumbles to himself every time he fills up his Ford Expedition, but he says gas prices would have to almost quadruple to $10 a gallon before he'd ditch his SUV.

Still, paying $55 to fill his 20 gallon tank isn't easy for the information specialist.

"This right here is catastrophic for a lot of families," Ammons, 54, said this week at a Houston Chevron station that was charging $2.65 a gallon for regular unleaded. "A lot of them have to choose: Do I buy food, do I send my kids to school or do I fill up my tank."

That choice may soon get a lot more difficult. The steep rise in oil prices to $90 a barrel over the past month means American consumers are almost certain to pay more for gasoline, heating oil, airline tickets and even food and goods that have to be transported great distances, experts say.

Some analysts are now predicting oil could go as high as $120 a barrel, but others argue that underlying supply and demand fundamentals do not support such a spike and that a drop in prices is more likely.

What is clear is that oil has become a magnet for "hot money" from hedge funds and other momentum investors betting that the trend for higher prices still has a way to run. The dollar's decline, which makes dollar-denominated oil futures a bargain to overseas investors, also has played a role in the recent runup.

Absent an astounding rise in prices, few economists expect high energy costs alone to push the economy into a recession, as previous oil price shocks did in the 1970s and early 1980s. That's because the economy has become more energy efficient, and incomes have grown faster than energy costs. On a percentage basis, the country spends half the amount on energy today than it spent in 1980.

Gasoline prices now average $2.76 a gallon across the country for unleaded regular, according to the Energy Information Administration. While that's down almost half a dollar from their May peak, pump prices are still 53 cents higher than a year ago.

Gas prices usually fall sharply after Labor Day — they dropped 62 cents last year between the end of August and mid-October, for instance. But this year, prices have actually risen slightly since summer's end. In part, that's because oil futures jumped 30 percent since late August, topping $90 a barrel for the first time ever on Thursday.

Falling prices for ethanol, a gasoline additive, and rising imports of refined gasoline, which have helped keep supplies adequate, have played a role in keeping retail prices relatively subdued. But that's not expected to last — many analysts now expect prices to rise by at least 10 to 15 cents a gallon, or more if oil pushes even higher.

"Consumers will now see higher prices at the pump in the coming months and weeks," said John Kilduff, vice president of risk management at MF Global UK Ltd.

There are signs high fuel prices are already having an impact. The EIA says demand for gas fell 0.5 percent over the last four weeks from a year ago, and has been lower since Labor Day. That reverses a trend in recent years of steadily rising demand. During some weeks this summer, demand rose more than 1 percent over the previous year.

The EIA also expects heating oil costs to jump 22 percent this winter. Demand may slip a little, but there's only so much homeowners dependent on that fuel source can do to cut back, especially if it turns out to be an unusually cold winter. The result may be less spending on other goods and services, which could hurt economic growth.

Higher jet fuel costs are already restraining airline earnings. For instance, Goldman Sachs analyst Robert Barry recently cut his fourth quarter earnings estimates for Delta Air Lines Inc. from 29 cents to 6 cents due to rising fuel costs. Spot jet fuel prices at New York Harbor rose to $2.42 a gallon this week, up from $1.80 a gallon a year ago, according to the EIA.

Airlines manage rising fuel costs in part by bumping up prices, said Philip Baggaley, an analyst at Standard & Poor's. But prices can only rise so far before they hurt demand.

Diesel prices are averaging about $3.04 a gallon, 54 cents higher than a year ago, and the American Trucking Association estimates the industry's total bill will jump $5 billion this year to $108 billion.

Trucking companies such as Yellow Transportation and Roadway Express, units of YRC Worldwide Inc., and package delivery firms such as United Parcel Service Inc. are able to pass on at least a portion of those higher costs to customers through fuel surcharges. But that's not an option for independent operators like Thomas DelBello, whose tab for each fill up of his dump truck has soared to $400.

DelBello says it's difficult for him to pass on the higher cost because many of the people he's driving for already have contracts — fuel prices included — with their own customers.

"It's hard to get any of it back," said DelBello, who lives 15 miles south of Houston. "These days, it's the cost of doing business."

Ultimately, higher costs trickle down to the consumer, though Bob Costello, chief economist for the ATA, said it's not easy to quantify how much. "You and I are eventually going to see something at the store," he said. "How much, there's no way for me to say."

Oil's rise has been impressive. In 2003, New York Mercantile Exchange oil futures averaged $31.08 a barrel. The march higher in the following four years by almost $60 a barrel has increased the U.S. economy's total energy expense by an additional $250 billion a year, said Lester Lave, a professor of economics at Carnegie Mellon University's Tepper School of Business. "That's a lot of money."

On Friday, light, sweet crude fell 87 cents to settle at $88.60 on the Nymex. Oil futures rose $4.91 last week.

Unlike earlier oil shocks, the latest price spike has not sent the economy into a recession. In part, that's because it has been gradual. Previous price shocks occurred over the course of weeks or months, not years. But it's also because fuel efficiency has risen and personal incomes have outpaced the increases in energy costs, analysts say.

In 1981, Lave said, 14 percent to 15 percent of the nation's gross domestic product was spent on energy. That's fallen to 7 percent today.

But the alarming pace of oil's most recent rally suggests prices paid by Americans could quickly rise to a level that hurts the economy.

Said Lave: "There's some price where you have to say, 'OK, I give in.' "

The Federal Reserve, by further reducing the prime interest rate, is trying to stimulate the American "economy." And as long as that happens we can expect high oil prices, because of economic demand. In fact they would also like to stimulate the economies of other countries, too, so that the latter can buy American products. We've really gotten ourselves into a corner on this one.

I think the Fed could have kept interest rates a point or even two points higher in the last five years and still kept real Americans busy and employed. Unfortunately, that doesn't show up in the statistics as "job growth". But, some companies, like Texas, California and Florida homebuilders who employ illegals, can accomplish that purpose--on behalf of the cheerleaders for "Growth." Way to go, Alan! Way to go, Jorge!

well that explans some thing but what about milk

?