Oil prices taking toll on budgets
Angela Sullivan scoots around in a Ford Escort to run errands and sets the thermostat in her home each night at 66 degrees. In other words, she’s hardly a fuel hog.
But with gasoline near $2 a gallon and home-heating costs on the rise, the 29-year-old resident of Fredericksburg, Va., says there’s less money for food, clothing and entertainment – which nowadays means a trip to Blockbuster, not the local movie theater.
“We’ve been getting by, but it’s hard,” said Sullivan, who hasn’t worked in three years and whose husband is a truck driver.
Just as $54-a-barrel oil chips away at economic growth, it also cuts into the budgets of many small businesses and families, particularly those with modest or fixed incomes.
Americans have already spent about $26 billion more on gasoline in the first nine months of the year than they did over the same period in 2003, a 16 percent increase. And they can expect to pay $14 billion more – at the very least – than they did last year for home-heating costs, another double-digit percentage increase, according to recent estimates from the Energy Department.
Yet while there is growing evidence that higher energy prices have contributed to a recent dip in consumer confidence and spending, they have not risen enough – at least not yet – to derail the country’s financial recovery. Oil prices would have to rise to $80 a barrel to match the 1981 peak, on an inflation-adjusted basis, while gasoline would have to climb to about $3 a gallon.
That helps explain how, in spite of the headline-grabbing energy prices, economists are forecasting that the economy expanded at an annualized rate of 3.5 percent to 4 percent in the third quarter ended Sept. 30, topping the 3.3 percent pace in the second quarter. One reason: As long as interest rates remain low, that enables consumers to borrow money cheaply to pay for new cars and new homes, and encourages them to rack up more credit card debt.
“When prices go up, everybody complains,” said Tony Waz, 28, who manages a small convenience store in Minneapolis. “But they’re not going to stop buying things.”
Jim Logan, 57, part owner of the River Lake True Value in Minneapolis, said he has been able to offset his own rising energy costs by charging more for the hardware he sells. “People notice it, but not like they notice it at the gas station,” he said.
That kind of pricing power is showing up elsewhere in the economy, but with a few exceptions, today’s soaring energy costs have not triggered a surge in inflation. The government reported Friday that wholesale prices rose only 0.1 percent in September.
That’s in part because the combination of better technology, planned conservation and the shrinking of the industrial sector has made America considerably more energy efficient than it was in the 1970s, when soaring fuel prices sank the country into a recession. Productivity gains have also helped companies maintain growth while limiting the need to add new workers.
On Friday, Federal Reserve Chairman Alan Greenspan said the rise in energy prices is likely to have far less of an impact on the economy than the oil shocks of the 1970s. He predicted that the global economy will adjust by boosting energy exploration and production and by increasing fuel efficiency. But he conceded that the transition period could feature unexpected bumps.
Even if oil prices were to rise to $80 a barrel, “it’s much more difficult to create a recession in the United States than it once was” as a result of greater energy efficiency, said Peter Morici, an economist at the University of Maryland.
The manufacturing and transportation industries have nevertheless taken a hard financial hit, since natural gas, diesel and jet fuel are still the lifeblood of their operations. Delta Air Lines Inc., the nation’s third-largest carrier, could be thrust into bankruptcy any day, in part because jet fuel prices are up almost 80 percent from a year ago.
Retailers have experienced a milder pain as consumers faced with higher pump prices have fewer dollars left over for apparel, CDs and other goods. Think of it as Exxon Mobil Corp. tapping shoppers’ wallets before Wal-Mart Stores Inc. gets a chance.
Gene Strickland, 40, who runs a mortgage brokerage in Denver, said higher energy prices and the “overall instability” in the economy have led him to ease back on personal and business spending, such as going out for coffee or taking employees out to sporting events. “There’s not as much frivolity as there was,” he said.
Sixty-two-year-old Denver resident Josephine Martinez said she no longer shops for clothes at Dillard’s or Wal-Mart. “Why go pay for name brands when you can go pick those up at the Goodwill for a lot cheaper?” she said.
“It’s quite clear that higher oil prices are having an impact on consumer spending,” said Nariman Behravesh, chief economist at Global Insight in Waltham, Mass. Even so, he estimates that on an annualized basis U.S. gross domestic product has taken only a 0.4 percent hit this year due to higher energy prices. That figure could rise to 0.7 percent next year if oil prices stay in the mid-$40-$50 range, he said.
On Friday, crude futures for November delivery fell 31 cents to $54.45 a barrel in afternoon trading on the New York Mercantile Exchange.
“We forecasted a scenario where we looked at the impact of $65 oil for a couple of quarters,” Behravesh said, “and it’s enough to push the economy to a very slow growth period of 2-2.5 percent. Under that scenario we would definitely see unemployment rise.”
Stuart G. Hoffman, chief economist at PNC Financial Services Group, blamed the high price of energy for much of the stock market’s malaise this year, saying investors are concerned about the outlook for corporate profits.
The thing to look for to determine whether these fears are ultimately justified, Hoffman said, “is to see if the rise in energy prices spreads into the core inflation rate.”
Although manufacturers of tires, paint and carpet have all raised prices in recent months on account of the higher cost of their petroleum-based raw materials, Hoffman, Behravesh and other economists said inflation remains benign.
That matters little to Deborah Rodriguez, 30, of Spotsylvania County, Va., who no longer takes her three children to amusement parks on the weekends because of the extra money it costs to fill up her Honda Civic. Instead, she takes them to nearby parks and prepares picnics.
“I used to do more stuff with them,” said Rodriguez, who will be out of a job in two months when the Payless ShoeSource outlet she manages closes its doors. “We just try to stay around the house more.”