Gas Prices Soar, Posing a Threat to Family Budget

NY Times
February 27, 2008

By JAD MOUAWAD

Gasoline prices, which for months lagged behind the big run-up in the price of oil, are suddenly rising quickly, with some experts saying they could approach $4 a gallon by spring. Diesel is hitting new records daily, and oil settled at a record high of $100.88 a barrel on Tuesday.

The increases could not come at a worse time for the economy. With growth slowing, energy increases that were once easily absorbed by consumers are now more likely to act as a drag on household budgets, leaving people with less money to spend elsewhere. These costs could worsen the nation’s economic woes, piling a fresh energy shock on top of the turmoil in credit and housing.

“The effect of high oil prices today could be the difference between having a recession and not having a recession,” said Kenneth S. Rogoff, a Harvard economist.

The depth of the nation’s economic problems became clearer Tuesday with the release of figures showing that prices at the producer level rose 1 percent in January from December, driven in large measure by energy costs. Compared with a year ago, prices were up 7.4 percent, the worst producer price inflation in the United States since 1981.

Other new figures showed that home prices around the country are falling at an accelerating pace, suggesting no end is in sight for the housing slump.

As of Tuesday, regular gasoline was selling at a nationwide average of $3.14 a gallon, according to AAA, the automobile club, up from $2.35 a year ago. The price has jumped 19 cents a gallon in two weeks.

Energy specialists predict that, as demand picks up further this spring and summer, retail prices will surpass the high of $3.23 a gallon set last Memorial Day weekend. That high fell short of the inflation-adjusted record of $3.40 in today’s money that was set in 1981.

On Tuesday, diesel prices rose to a record $3.60 a gallon, compared with $2.62 a gallon last year.

For a decade, rising oil prices failed to dent global economic growth. In the United States, consumers absorbed the higher costs because of easy credit and rising prosperity, while in developing countries, government subsidies helped ease the pain. The rise in energy prices was a result of growing demand around the world.

The price of oil has quadrupled in six years, and the close Tuesday was not far below the inflation-adjusted high set in April 1980, after the Iranian revolution. That record, $39.50 a barrel, equals $103.76 in today’s money.

As oil prices spiked last fall, low wintertime gasoline demand helped keep prices in check. But now, experts say, the price of oil is finally showing up at the pump.

For ordinary Americans like Phyllis Berry, a 31-year-old factory worker for General Motors in Cleveland, gasoline costs are starting to hurt.

“I used to fill it up pretty regularly, but now I drive it until the tank is almost empty, looking for the cheapest place to buy gas,” said Ms. Berry, who drives a beat-up Dodge Caravan.

She said that she used to take her four children to the movies four or five times a month. But with the cost of gas, tickets, popcorn and soda adding up to $70, they now go only once a month.

Still, things are not quite as bad as during the 1970s and 1980s oil shocks. In the early 1980s, at the height of the last energy crisis, energy accounted for about 8 percent of household spending. As prices fell and the economy became less energy-intensive, energy costs fell under 4 percent of household spending in the early 1990s.

With the run-up in prices in recent years, economists say energy’s share of disposable income is slowly creeping up again. In December, that figure reached 6.1 percent, the highest level since 1985. The increase of two percentage points — amounting to $200 billion — is a huge sum, a little less than half what Americans spend each year on new cars and automobile parts.

“You’re adding an oil shock on top of a crunch on credit and a housing collapse,” said Nigel Gault, an economist at Global Insight. “Even the U.S. economy cannot withstand all of that at the same time.”

American consumers have responded belatedly by cutting back on their energy use. Oil demand in the United States grew by just 0.4 percent in 2007 and is expected to be flat in 2008.

But global oil demand, the relentless driver behind higher prices, is still expected to increase by 1.4 million barrels a day this year, analysts estimate. That growth, from China and the Middle East, may help keep prices up, whatever happens to the American economy.

According to the latest forecast by the Energy Department, gasoline prices should peak near $3.40 a gallon this spring.

But many analysts consider the government’s forecast conservative, foreseeing a sharper spike as refiners come out of the seasonal maintenance period and start producing summer-grade gasoline in March and April.

“We’ve gone this high without the normal summer dynamics,” said Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service. “That’s when I think we will have the big jump — of 50 cents to 75 cents a gallon.”

Mr. Kloza said he expected gasoline to peak around $3.50 to $3.75 a gallon nationwide. Geoff Sundstrom, AAA’s spokesman, echoed that view and added that gas at $4 a gallon is possible this summer. “We’ve gone from a worrying situation for gasoline to one that is quite alarming,” Mr. Sundstrom said.

Oil prices are unlikely to drop anytime soon, analysts said. Barclays Capital recently increased its long-term prediction, saying prices could reach $137 a barrel in 2015, up from a previous target of $93 a barrel.

“The remorseless move up in long-run prices has not yet fully played out,” Barclays analysts said in a note to investors.

While demand keeps growing, producers are struggling to catch up. They are not replacing the oil they are pumping out of the ground fast enough because of restrictions on access to fields, as well as rising costs. Meanwhile, demand in China, India and the Middle East is expected to push oil consumption up by more than one million barrels a day, each year, for the next decade.

“An oil crisis is coming in the next 10 years,” John B. Hess, the chairman of the Hess Corporation, said at a recent conference held by Cambridge Energy Research Associates. “It’s not a matter of demand. It’s not a matter of supplies. It’s both.”

Christopher Maag contributed reporting from Cleveland.