NY Times: U.S. Economy Is Better Prepared for Rising Gas Costs


gasThe increase in energy prices is beginning to resemble the rise in 2008. But this time, the American economy may be better prepared for higher fuel costs.

Gasoline prices have risen by nearly a third in the last year, and oil costs more than $100 a barrel for the first time in more than two years, driven by fears of extended Middle East supply disruptions and increased demand from an improving global economy.

While the latest surge in energy prices is likely to cause some pain and slow the recovery from the recession, economists say the spike is unlikely to derail the rebound unless prices rise a lot further.

One big reason is that consumers and businesses have learned lessons from the last oil shock. Many drivers, for example, have given up their gas-guzzling sport utility vehicles. Automakers, which are selling more fuel-efficient cars than five years ago, reported higher sales in February even as gas prices rose.

Industries like airlines and trucking, which are most severely affected by fuel prices, have passed on their higher costs almost immediately instead of waiting for the price increases to hammer profits.

And much of the rest of the United States economy is far less dependent on oil than it used to be. Oil consumption has dropped more than 5 percent since 2005, while natural gas use has risen 10 percent. A glut of domestic natural gas has kept prices low, providing a lift to industries like chemicals and pharmaceuticals and tempering the price of electricity, much of which is generated from natural gas.

Still, higher oil and gas prices matter. Daniel Yergin, the oil historian, said the recent increase “forces people into really difficult choices.” He said, “It becomes a thermometer, a register of fear and anxiety.”

Nouriel Roubini, the New York University economist who became known for his pessimistic forecasts before the financial crisis, told reporters in Dubai on Tuesday that an increase in oil prices to $140 a barrel could even cause some advanced economies to dip back into recession.

The rising price of gas – which averaged $3.57 a gallon nationwide on Monday, according to the government – is already prompting some people to change their habits.

Ronnie Undeberg, 50, of Summerfield, Fla., started driving less in December, when gas hit $3 a gallon. “I started planning my errands,” he said. If gas reaches $4, Mr. Undeberg, a discipline clerk at Lake Weir Middle School, said he would scale back his cable television package and cut his cellphone use.

Higher fuel costs reduce consumers’ discretionary income, which is often spent on such niceties as dining out or the latest electronic devices. Low- and middle-income families are typically hurt most by a higher price for energy because they spend a higher portion of their household budget on gas and heating bills.

It is unclear how long energy prices will stay high. Most oil exports from Libya have stopped amid the fighting there. But Kuwait’s oil minister, Sheik Ahmad al-Abdullah al-Sabah, said that the Organization of the Petroleum Exporting Countries was discussing whether to hold an emergency meeting soon to increase oil production. Saudi Arabia has also said it would pump more oil to make up for the shortfall in Libyan exports. On Tuesday, oil prices fell slightly to settle at $105.02 a barrel in New York.

Some economists say that the increase in oil prices over the last year, well before the wave of protests in the Middle East and mostly caused by higher demand, may already have cost the United States economy hundreds of thousands of jobs. One rule of thumb is that each $10 increase in the price of a barrel of oil knocks 0.2 to 0.3 percentage points off the growth rate of the economy.

“High oil prices always hurt our economy,” said Lawrence J. Goldstein, an economist at the Energy Policy Research Foundation. “Sometimes they get masked from consumers, but you cannot hide their impact on the economy. What it is going to do is leave us with anemic and sporadic growth that to most Americans will still feel like a recession.”

But so far, consumers and businesses seem to have adapted to the higher prices much more quickly than in 2008, when gasoline reached an average of $4.11 a gallon and oil topped $145 a barrel. In part, that is because the last oil shock helped prompt a new focus on energy efficiency.

Take automobiles, for example. Congress got hundreds of thousands of the worst gas guzzlers off the road with the cash-for-clunkers program. And automakers changed their product mix to emphasize more small cars and fewer sport utility vehicles, reflecting consumer demand and tougher fuel-efficiency mandates from the government.

As a result, the industry is better prepared for high gas prices. Mike Jackson, the chief executive of AutoNation, the country’s largest chain of dealerships, said half of the vehicles on his lots are now cars, up from 40 percent in 2008, and just 8 percent are sport utility vehicles, down from 15 percent three years ago.

Drivers like Tival Williams, 39, a self-employed fashion designer from the Ditmas Park area of Brooklyn, also learned from the last price spike. Mr. Williams dumped his large S.U.V. and now drives a thriftier Mazda CX-9 crossover. “Then I was paying $100 a week” for gas, he said. “Now I’m paying $70 a week.”

Industry executives said higher gas prices are more likely to cause a shift toward smaller cars than to reduce sales overall. If the automakers are wrong, the financial pain will be less severe; after going through its bankruptcy, General Motors has been careful about ramping up production and now has just about two months of inventory at dealerships, down from more than four months in 2008.

Other sectors of the economy so far have weathered the storm. Michael P. Niemira, chief economist for the International Council of Shopping Centers, said anecdotal information from shopping malls across the country “is surprisingly strong.”

“It appears that the consumer is still spending,” he said. But if oil prices stay above $100, “it will erode confidence and discretionary purchasing power,” he said.

The trucking industry may also be better prepared for an oil shock than it was in 2008. Not only have more companies adopted fuel surcharges, they have also tried to find ways to make their fleets more efficient. Some have begun giving drivers bonuses if they reach particular fuel efficiency targets, for example by driving slower.

Still, such measures can do only so much. “At $3 a gallon, you start to get a little bit of heartburn,” said Bob Costello, chief economist for the American Trucking Associations, an industry group. “Anything over $4, and panic sets in, with companies wondering if they can survive.”

{NY Times/Matzav.com Newscenter}