Advertisement

Crude Oil Touches $40 a Barrel, Endangering Pace of Recovery

Share via
Times Staff Writer

Crude oil prices hit $40 a barrel for the first time in 13 years Friday, reinforcing worries that months of high energy prices could cripple trucking, airlines and other key industries and become a drag on the nation’s economic recovery.

The high cost of gasoline, jet fuel and diesel “just doesn’t look like it’s going to go away,” said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp., and the consequences are being felt throughout the economy.

Already, some airlines have added a fuel surcharge to ticket prices, tapped-out truckers are refusing to carry port freight, shoppers are steering clear of gas-guzzling sport utility vehicles and farmers are paying extra to get their goods to market.

Advertisement

Higher fuel prices have added about a penny to the roughly 10-cent cost of shipping a pound of strawberries from Salinas to Southern California, said Dan Crowley, sales manager of Well-Pict Berries Inc. in Watsonville.

“That might not sound like a lot, but when you are shipping by the truckload it starts to add up,” Crowley said.

The irony for many industries is that the thing they’ve wished for -- a rebounding economy -- is partly to blame for the high oil and gasoline prices.

Advertisement

“It’s great to see a recovery in earnest in the manufacturing sector,” said Darren McKinney, spokesman for the National Assn. of Manufacturers, noting the robust jobs report released by the government Friday.

“But it’s a double-edged sword,” he added. “As orders go up, factory output increases, and so will the demand for energy, along with a greater likelihood for energy price spikes and energy supply shortages.”

After hitting the $40 mark Friday, the cost of benchmark crude for June delivery ended the day up 56 cents at $39.93 a barrel on the New York Mercantile Exchange. That was the highest closing price for crude futures since Oct. 11, 1990, when Iraq’s invasion of Kuwait was roiling world oil markets.

Advertisement

The 23% run-up in crude prices this year comes against a backdrop of rising prices for a raft of commodities such as soybeans and cheese and hints from the Federal Reserve that a hike in interest rates could be on the way. Stock and bond prices have tumbled as a result.

In a recent speech, Fed chief Alan Greenspan focused on the “dramatic increases” in energy prices, which he warned could “significantly affect the long-term path of the U.S. economy.”

The most recent jump in crude prices followed last weekend’s terrorist attacks against Saudi Arabian oil facilities and the U.S. ambassador’s advice that Americans leave the country. About $5 of the current crude price stems from “geopolitical anxiety,” which reflects fears that terrorism or political unrest could disrupt oil exports from the Middle East, Latin America or Africa, said Daniel Yergin, chairman of Cambridge Energy Research Associates.

More broadly, Yergin said, oil prices have jumped as expanding economies in the U.S. and China have pumped up demand and stretched relatively tight worldwide oil supplies.

In California, the combination of high crude oil prices and tight supplies have led to record gasoline prices, which have averaged more than $2 a gallon for 11 straight weeks, and diesel prices that hit a record $2.274 a gallon this week. Jet fuel, natural gas and heating oil prices all have soared as well -- as have oil company profits.

Economists point out that the role of crude oil in the U.S. economy is not as large as it was during the oil shocks of the 1970s, when manufacturing was the dominant industry and engines of all kinds were far less fuel efficient than today’s models. And, when adjusted for inflation, today’s prices are about half of what they were in 1981.

Advertisement

“But oil prices still have a pervasive influence because almost every good and service is produced with energy, and there’s transportation,” said Lisa Grobar, professor of economics at Cal State Long Beach. “It’s a noticeable impact, certainly, in terms of slowing down the economy.”

Still, she said, “It could be worse, and has been worse.”

That’s not much comfort to Valerie Liese and her sister, Erin Sipprelle, who together run a Chino-based trucking company founded by their father. High diesel prices are squeezing their business.

“How are we doing?” Liese asked. “Do you want to buy a trucking company real cheap?”

Her firm, Jack Jones Trucking, has 50 trucks that haul concrete pipes, construction gear and office furniture nearly anywhere from Santa Barbara to San Diego.

She raised her prices 12% to make up for higher fuel prices. But now her hold on longtime customers is weakening.

“We have had some customers ask us to lower our rates and we really can’t,” Liese said.

A week ago, independent truck drivers who serve the ports in Los Angeles, Long Beach and Oakland refused to haul cargo in protest of the high fuel prices, slowing the flow of freight to and from the ports.

Some railroads have blunted the effects of the diesel run-up by using financial hedges to lock in prices before they jumped. Burlington Northern Santa Fe Corp., a major California freight hauler, has hedged more than half of its expected fuel requirements for the rest of the year.

Advertisement

For airlines, the high cost of jet fuel means a slower recovery from its terrible slump of the last three years, and prices will probably saddle the industry with additional heavy losses this year, analysts said.

The spiraling cost of jet fuel, up 29% this year, is the airlines’ second-biggest cost after labor, and is the key reason analyst Sam Buttrick of investment firm UBS widened his forecast of the industry’s 2004 losses to $2.3 billion from his previous estimate of $500 million.

To reduce the pain, American Airlines and a few other carriers Thursday added a $2 surcharge to one-way domestic fares. But whether they’ll stick is uncertain. Previous attempts to tack on fuel-related surcharges have failed because most rivals would not match the moves.

The auto industry has begun to suffer a bit too. Car dealers say they have noticed a definite shift away from the biggest sport utility vehicles and pickup trucks since fuel prices began their latest skyward climb.

Sales of all types of SUVs continue to rise, but the gains are being recorded by the smaller, car-based “crossover” models such as the Ford Escape. Large, gas-gulping SUVs such as the Hummer, Ford Expedition and Toyota Sequoia -- among the most profitable models -- took big hits in April as many would-be buyers either switched to a more fuel-efficient model or simply pulled out of the market in hopes that fuel prices will fall again.

“I’ve been selling cars for 30 years, and every time fuel prices spike we see a little drop in sales,” said Jim Graham, owner of Santa Margarita Ford in Rancho Santa Margarita. But Graham said he expected that “people will find ways to adjust.”

Advertisement

There are glimmers of hope, at least in the short term, said Yergin of Cambridge Energy Research. World oil supplies have been improving, he noted, and absent further geopolitical unrest, crude prices could moderate this summer.

But that prospect is uncertain at best.

“What these prices signal,” Yergin said, “is that there’s trouble in River City.”

*

Times staff writers James F. Peltz, Ronald D. White, John O’Dell and Jerry Hirsch contributed to this report.

Advertisement