Oil prices continue climb, but impact muted - for now

Economy has absorbed increases, but may have entered `danger zone'

The Cost Of Energy

August 17, 2005|By Jamie Smith Hopkins | Jamie Smith Hopkins,SUN STAFF

How high is too high?

If you had asked analysts a few years ago what $67-a-barrel crude oil would mean for the U.S. economy, they would have said recession - not strong job growth and relatively low inflation. And certainly not Americans traveling at record levels, as they're doing this summer, AAA Mid-Atlantic reports.

"This is a really different situation from anything we've seen before," said Thorsten Fischer, who studies energy issues for Economy.com.

That's not to say that gasoline approaching $3 a gallon isn't already a drag, economists say; it has been a drag since last year. The Consumer Price Index - which measures the cost of goods and services - rose half a percent last month, the Labor Department said yesterday. Energy was almost entirely to blame. Also yesterday, Wal-Mart Stores Inc., the world's largest retailer, said its third-quarter earnings will be lower than expected because fuel costs are biting into customers' budgets.

Gas prices will probably shave off at least a percentage point from this year's gross domestic product, the value of goods and services produced in the U.S., said Scott J. Brown, chief economist for investment firm Raymond James & Associates.

But what surprises economists is that the damage to the larger economy is not worse - at least not yet. It's little wonder that no one seems to want to predict the turning-point price - that moment when oil goes from drag to disaster. Is it $75 a barrel? $100?

Economists believe that the country has more cushion from oil price shocks than it did in the 1970s and early 1980s, when price spikes and shortages led to higher interest rates, fueling a national malaise. Nowadays, low interest rates are helping to offset high fuel costs. So are rapidly rising housing values, which consumers have tapped to stretch their buying power.

And though the U.S. is using much more energy, it's using it more efficiently, said Steve Yetiv, author of Crude Awakenings: Global Oil Security and American Foreign Policy. High-tech improvements to manufacturing processes and to home insulation help to balance out the effect of gas-guzzling SUVs.

"It takes 30 percent less energy to produce a dollar of gross domestic product today than in 1970," said Yetiv, a professor at Old Dominion University.

Still, that only goes so far, he said. The full impact of oil prices takes a while to work through the economy, so the most recent run-up has yet to be truly felt - never mind the 15-cent jump in gas prices just in the past few days. Many companies have held off passing on increases in their own transportation and raw-material costs to consumers, but they can't do it indefinitely.

And the surge may only be starting. Investment banking firm Goldman Sachs predicted this spring that crude oil is in the early stages of a "super spike" toward $105 a barrel.

Already, Yetiv said, "I think we've entered the danger zone" for the economy.

Most people agree. Almost two-thirds of Americans expect financial hardship in the next six months from increasing gas prices, according to a survey last week by polling firm Ipsos-Public Affairs for the Associated Press and America Online.

The problem is, oil touches everything.

"We put it in our gas tanks, but it's also in our clothes, it's in our pharmaceuticals, it's in fertilizer, it's in asphalt, it is in the cost of almost every product that requires transportation," Yetiv said.

So far, consumers haven't borne the brunt of those less obvious fuel costs because companies somewhere on the supply chain are eating the increases, Brown said. But that's beginning to change. Many airlines have raised their fares this month - even low-cost leader Southwest, the leading carrier at Baltimore-Washington International Airport. Of course, one reason the airlines have been in so much trouble is that they couldn't pass on fuel-cost increases because demand wasn't high enough - and now it is.

Even without wider economic implications, some observers figure that continually climbing prices will sour the American love affair with SUVs. Tom Matte, a senior vice president with ATC Logistics of Maryland Inc., which imports and exports automobiles through the port of Baltimore, expects to see more fuel-efficient hybrids.

"I've got a big Land Cruiser, so I get 10 or 12 miles to the gallon," he said. "At $3 a gallon, let me tell you, I'm going to be looking for a hybrid car myself."

He bought gas yesterday, so it's fresh in his mind. The average price in Maryland for a gallon of regular unleaded yesterday was $2.58, said AAA Mid-Atlantic. That's five cents higher than the day before, 15 cents higher than Friday and 70 cents higher than a year ago.

"This is the seventh day in a row we're at record-breaking highs," said Amanda Knittle, a AAA spokeswoman.

Not quite: Adjust for inflation, and the early 1980s were worse. But not by much.

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