Economics is truly an imprecise science ...
In my opinion, I cannot envision oil prices stopping their climb over the
next 5 years. With hope, I will be completely off-base.
Economy Shows Signs of Strain From Oil Prices
8-17-2005
www.nytimes.com
By JAD MOUAWAD and DAVID LEONHARDT
Inflation surged last month, the government reported yesterday, asthe long rise in energy prices finallyseemed to be pinching the Americaneconomy. After absorbing the burdenof oil at $40 a barrel, then at $50 andbeyond, consumers have started toreact as prices have risen above $60in recent weeks. Wal-Mart blamed high oil pricesyesterday as it reported that in therecent quarter its profits rose attheir slowest rate in four years. Thechief executive, H. Lee Scott Jr., toldinvestors that expensive oil wasworrying him because it seemed tobe erasing recent income gains formany customers.Airlines have already felt the sting ofincreasing jet fuel costs. Last week,Delta, United and Continental raiseddomestic fares in their latestattempt to stem losses; Delta isstruggling to avoid bankruptcy.United Parcel Service recentlyreminded its drivers not to leavetruck engines running while theydeliver packages.Nearly all of the jump in inflation lastmonth came from energy. Overallprices rose 0.5 percent in July - and3.2 percent over the last year - afterhaving been flat in June.Across the country, families aretrying to figure out where to cutcorners so they can afford gas thatnow averages $2.55 a gallonnationwide after posting the biggestweekly jump in at least 15 years,according to the latest governmentstatistics."We spend much less," said HollieTubbs, a 32-year-old teacher'sassistant in Brooklyn. Instead ofgoing to the movies, watching playsor dining out, she now takes walks inthe park with her husband and sonand checks the newspaper to seewhen a nearby Barnes & Noble will beholding a free story hour."Everything is related to gas prices.The more you drive, the more youspend. In order to bring the budgetdown, we stopped driving."If consumers are feelinghard-pressed by higher gasolineprices, matters could become worsethis winter when heating oil billsarrive. Some commodity analystssay that is when the full impact ofthe higher energy costs will be felt.Forecasters still expect economicgrowth to remain healthy for therest of the year, as companies investin new factories and the housingboom continues. But the high cost ofoil already appears to be curbinggrowth, translating into unusuallymodest gains in employment andpay.If history is any guide, higher priceswill hurt consumption, curb thenation's output and shift spendingpatterns. The risks of a dominoeffect on the economy are real,economists say."We can't lose sight of the fact thatenergy restricts growth," saidAnthony Chan, a senior economist atJ. P. Morgan Asset Management. "It isdoing so."So far, the economy has showedmuch more resilience in the face ofhigher energy costs than mostanalysts had anticipated. Althoughprices began rising in early 2002,consumers have kept shopping,companies have expanded andinflation has remained under control.At times, it seemed a new economicera had dawned.Without question, economists say,rising oil prices cause less economicpain than they once did. It takes halfas much energy to produce $1 ofgross domestic product today,adjusted for inflation, than it did 30years ago. Even at today's prices, oilis cheaper than it was in the early1980's, once adjusted for inflation.The falling costs of other goods,thanks in large part to globalcompetition, have also helped cushionthe blow from higher energy costs.While energy prices rose 3.8 percentfrom June to July, the price of allother goods inched up only 0.2percent, the Labor Department saidyesterday."There seems to be a greatertolerance in the economy in terms ofwhat can be withstood," said DougLeggate, an energy analyst withCitigroup in New York.But a spike in oil prices still hurts,economists say, even if the pain doesnot come immediately. In the past,the full effect was not felt until ayear, or even two years, after pricesbegan rising. Both of the last tworecessions - in 1990-91 and in 2001 -began more than a year afterenergy prices started a sharp climb."It is way too soon to be sanguine,"said Andrew J. Oswald, an economistat the University of Warwick inEngland, who has written about oil."The influence of a petroleum shockruns deep and runs slow. My own viewis that we will find oil shocks still hurt,and hurt fundamentally."It was only 13 months ago that theprice of a barrel of crude settledabove $40. Oil, which closedyesterday at $66.08 a barrel on theNew York Mercantile Exchange, is notlikely to become much cheaperanytime soon, analysts say. Nor arenatural gas prices, which have gained73 percent this year. This means thatwinter heating bills for Americanhouseholds are set to soar."Higher gasoline prices and heating oilbills are like consumption taxes," saidBob Gillon, a senior analyst with JohnS. Herold Inc. "They will be a hardshipon many. People will cut back on somepurchases."The blow has been softened in recentyears by falling long-term interestrates, which have allowedhomeowners to refinance theirmortgages and cut their monthlypayments, and by rising housevalues."You don't have to take a couplehundred bucks and stick it in the bankeach month, because your homeprice is going up," said Lakshman R.Achuthan, managing director of theEconomic Cycle Research Institute inNew York. "You might even withdrawsome money."Despite some scattered signs of aslowdown, like Wal-Mart'sannouncement yesterday, consumerspending has continued to increase.Home Depot and J. C. Penney bothreported yesterday that theirprofits rose in the most recentquarter.But the portion of income thatAmericans save each month, onaverage, has now fallen to zero,according to the government. Thatleaves families with scant cushion; ifthe savings rate were higher, peoplecould cover rising energy costs bycutting back on the amount ofmoney they set aside.Most workers have received only atiny raise in their hourly pay since2001, according to inflation-adjustedfigures from the Labor Department."Consumers have held up theeconomy," Mr. Oswald, theeconomist, said. "But, of course, thatkind of behavior cannot be sustainedin the long run. Eventually, realitydawns, and high energy prices comeback to bite you."The biggest reason to think that theeconomy could avoid anotherdownturn is that today's high pricesare to a large extent a byproduct ofrobust economic growth. Duringprevious oil shocks - in 1973 and from1979 to 1981 - prices rose becausesupplies were cut off.Today's surge in oil prices is a resultof demand from consumers in theUnited States and China, leading to asustained rally that began at the endof 2003.So, high prices may be able to do onlyso much damage to economic growth,some economists say. If the economystarts to stall, energy prices willprobably come down, too.Among the worst-hit by the high oilprices are airlines, whose woes overthe last few years have beenaccelerated by fuel costs.With fuel bills expected to reach $83billion this year, a 36 percent jumpfrom last year, airlines are finding itincreasingly difficult to hedge againsthigher prices. This year, their lossesare expected to reach $6 billion, upfrom $4.2 billion last year, accordingto the International AirTransportation Association.At U.P.S., which operates the world'sninth-largest airline, as well as a fleetof 88,000 trucks, the energy billsoared 45 percent in the secondquarter this year, after a 30 percentjump in the first quarter and a 35percent increase in 2004 comparedwith 2003."Oil prices have risen more suddenlythan we had anticipated," said SusanRosenberg, a U.P.S. spokeswoman.Besides asking drivers not to leavetheir truck engines running whendelivering packages, the company iscounting on new technology to helpdrivers determine the best deliveryroutes, saving an expected 14 milliongallons of fuel. It has also passed onsome of the added energy costs as afuel surcharge.The effect of higher prices has hadan uneven impact on companies. "It'sa mixed bag," said Neil Elliott, adirector at the American Council foran Energy-Efficient Economy, anonprofit research organization. Theindustries most affected "tend to bea slow or declining part of theAmerican manufacturing base."Some companies have simply shutdown factories or moved them tocountries where energy and othercosts are less expensive.Dow Chemical, for example, hasclosed dozens of plants in the UnitedStates, including two major ones in2002 and 2003, as natural gas pricesstarted to soar. Last year, therun-up in energy prices cost thecompany an extra $3.4 billion."We can pass on some of the costs,and we have, and we try as hard aswe can," said Gordon Slack, thedirector of the company's energypolicy. At the same time, it hasplanned expansions in Kuwait andinvestments in Oman, where naturalgas is cheaper.Instead of passing on the costs,carmakers have sharply cut prices toattract buyers. For much of theyear, sales of gas-thirsty sportutility vehicles and pickup truckshave declined. Then in July, the firstmonth all three Americanautomakers extended theiremployee discounts to all buyers,sales shot up.Some industry experts said thediscounts allowed consumers to shrugoff the high gas prices."That $30,000 S.U.V. became$27,000 or $26,000," said WalterMcManus, a scientist at theTransportation Research Institute atthe University of Michigan.Consumers, he said, are willing tooverlook the extra money they willhave to spend on fuel because theybelieve that it is offset by the deepdiscount.In the end, much will depend onconsumers."It wasn't nearly as bad" last year,said Tina M. Leshowitz, a 42-year-oldbookkeeper from Lodi, N.J. She saidthat she expected energy prices tokeep rising through the winter andthat she would probably have tocancel her planned Christmas tripbecause of rising ticket prices."It's out of control now. I've got to cutback on everything."Until now, consumers have not madegood on such threats. But someeconomists say that more familiesmay be starting to do so.
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