Stubborn fuel prices may haunt consumers in ‘06

WASHINGTON — Terry Grandchamp’s Virginia home-remodeling business is booked through spring and he’s planning to bump up his prices to help cover the high cost of gasoline and building materials. But when it comes to his own finances there is no passing the buck, so Grandchamp is doing his best to conserve fuel at home and on the road.

Chemical maker Tomah3 Products Inc. of Wisconsin is somewhat less confident customers will continue to absorb the soaring price of natural gas in 2006. That’s forced company president Steve King to shrink his work force through attrition and hire a commodity broker to manage his fuel purchases.

At North Carolina-based Family Dollar Stores Inc., the biggest worry these days is that the already tight budgets of low-income shoppers will be nearly busted by the expected surge in home-heating costs this winter. The company aims to stabilize itself by selling fewer discretionary goods and more essentials such as food and health products.

Such is life for consumers and companies grappling with the prospect that today’s high energy prices may stick around for a while. Crude-oil prices, while sharply below the 2005 peak of almost $71 a barrel in August, are expected to average more than $55 a barrel through the end of next year and potentially longer than that. That is more than two-and-a-half times the $19.70 a barrel that crude-oil futures averaged during the 1990s, and about 60 percent more than the average price since 2000.

It’s probably not enough to cripple the economy in 2006, but stubbornly high prices for oil and natural gas could stunt growth and increase inflationary pressures for the second year in a row. With supplies still relatively tight, there is always the risk of a more severe energy-related economic shock if there were a major disruption like the most recent hurricane season.

Economists say the more likely scenario is that Americans will begin to breathe a little easier by the second half of the year. That’s because they will have already absorbed much of the pain of a multiyear run-up in prices and will benefit from stable, if not falling, energy costs.

From airlines to manufacturers to retailers, “we’re seeing a lot of emphasis on conservation in business,” said Stephen P. Brown, an economist at the Federal Reserve Bank in Dallas. Companies that weren’t already making changes before hurricanes Katrina and Rita are doing so now because they saw how tight supplies are and how easily a disruption could push up prices, he said.

At the consumer level, Brown sees the discounting of SUVs and the premiums auto dealers are charging for gas-electric hybrids as the early signs of a slow but significant change.

“These things take time,” he said. “Quite often, people mistake the amount of time it takes to adjust to prices as evidence of society not responding.”

Increased energy prices and interest rates are expected to dent consumer spending in 2006 and that is why economists are calling for U.S. economic growth of about 3.3 percent in 2006, down from 3.5 percent in 2005. But they also say lower consumer and corporate spending should help offset energy prices’ effect on inflation.

Economist Nariman Behravesh of Global Insight said core inflation could climb as high as 2.5 percent in the first half of 2006 as 2005’s energy prices trickle through the economy. But price pressures will ease by the second half of 2006 as oil and natural gas costs make a post-winter retreat and the Federal Reserve continues to gradually raise interest rates.

“That will cool down the housing market,” Behravesh said.

“And if your home price isn’t rising, you’ll be less likely to take a home equity loan for a car or some other big purchase.”

The rising rates will also make it more expensive to take on credit card debt and that could further dampen spending by consumers who are already tapped out, economists said.