Business

Q-and-A: Energy prices could impede recovery

Higher bills take money out of spenders’ pockets

Energy prices are starting to soar again.

Oil prices, for starters, have broken free of the fundamentals that usually rule the market, rising despite a glut in surplus crude oil. Benchmark crude climbed to its highest level in eight months Thursday, touching $73.23 a barrel on the New York Mercantile Exchange.

Gas prices at the pump have been surging too, reaching a national average of $2.63 a gallon.

Here are some questions and answers about the economic consequences of high energy prices.

Q. How do rising energy prices affect the economy?

A. Americans buy so much gasoline that a $1 increase in pump prices means a $140 billion annual hit on the economy. That’s $140 billion that won’t go into savings accounts, college funds, restaurants or toward movie night. And economists believe that more spending is what is needed to help pull the country out of recession.

James Hamilton, an economist at the University of California, San Diego, said that energy costs now add up to more than 6 percent of American consumer spending. At that rate, people start rearranging their budgets.

Historically, that means they’ll hold off on buying everything from a new car to a new pair of shorts for the summer. Even underwear gets a few extra miles during a recession, economists say.

Gas prices have added roughly 60 cents a gallon since the start of May, and they’re again flirting with $3 a gallon in California, Illinois, Michigan and Washington, according to auto club AAA, Wright Express and Oil Price Information Service.

Q. Which industries are most affected by rising energy prices? And if I work in an unrelated industry, will I feel the effects?

A. Energy-intensive industries like shipping companies, airlines and trucking companies are hit hardest – but yes, price increases do filter down to nearly everyone. For example, airlines pointed to higher fuel prices last year when they cut flights to smaller hubs and started charging for checked bags, better seats in coach and other items that were once free.

Q. Does all this mean it might take longer to emerge from the recession?

A. It’s possible. Spending more on gas, heating oil and other petroleum products can leave businesses with less money to hire new workers or give raises. Consumers would have less to spend as well.

Q. If I think prices are going to continue to rise, is there a way I can lock in prices now so I’m not paying more to heat my home in the winter?

A. A lot of utilities around the country allow homeowners to buy their natural gas and heating oil in advance, locking in prices for months or even years at a time.

Experts say natural gas is almost certain to go up. Locking in now looks like a pretty good bet, if you can do it.

Q. If we’re in a recession, why are energy prices spiking – and how long can this go on?

A. Energy prices can fall when an economy slumps, as manufacturers shutter factories and laid off workers keep their cars off the road. But gas prices usually rise in the summertime as leisure travelers hit the road and refiners switch over to more expensive blends of gasoline for environmental reasons.

Many experts are predicting a gradual drop in gas prices this year. However, many states like California already are seeing prices of $3 a gallon in some places.

Much of what is happening now in energy markets is being blamed on money pouring out of Wall Street as a hedge against a weakening U.S. currency. Commodities like oil and gas attract investors during uncertain times because they’re solid, tangible investments; also, a weak dollar makes it cheaper for foreigners to invest in oil and gas.

All that increased investor demand pushes up prices.

The Energy Department’s Energy Information Administration predicted on Tuesday that consumers will be paying a national average of $2.70 a gallon by July, before prices level off.



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