Who Wins, Who Loses? : Energy: If prices stay high, Americans will pay billions more for everything from fuel to food. But there will be benefits for some.
While much of the world braces for the sting of higher energy costs, not everyone is complaining.
“A higher price of oil supports more drilling and therefore our equipment will be used more,” said Maurice E. Jacques, vice president of Varco International, an Orange County firm that makes equipment used on drilling rigs.
Varco, of course, is the exception. If the price of oil remains at a high level--or rises even more--winners, such as Varco, will be greatly outnumbered by losers.
Makers of steel, chemicals and countless other products that gobble vast amounts of fuel would be jolted by higher costs. Consumers would feel the pinch as household necessities rose inexorably in price. Next winter, Americans could pay an added $18.8 billion for fuel oil, natural gas, electricity and gasoline, according to an analysis by the WEFA Group of economic forecasters in Bala Cynwyd, Pa.
In a world of oil-sparked inflation, people would have less money left over for new cars, refrigerators, dishwashers, furniture and other big-ticket items.
“There are many more losers than winners in this kind of oil shock,” said Allen Sinai, chief economist with Boston Co. “It depresses overall economic activity and raises business costs.”
Whether higher energy costs are a burden or bonanza, they are a reality--at least for now. Here’s a glance at some of the losers and beneficiaries if the price of energy stabilizes near its current high level.
Winner: Energy Tax Opponents
Before the oil shock, members of Congress had begun to look at energy taxes as part of a plan to reduce the nation’s budget deficit. Among the proposals: a broad-based energy tax, a tax on gasoline and a “greenhouse” tax, directed at fossil fuels or a product’s carbon content.
But the oil shock has given tax opponents a potent new weapon in the lobbying war against new taxes, a war supported by many in private industry who wish to keep energy costs to a minimum.
“In my mind, this should knock the idea of energy taxes right out of the ballgame,” said John Cohen, director of energy and natural resources at the National Assn. of Manufacturers in Washington.
Loser: Grocery Shoppers
It’s not itemized, but energy is a big part of your food bill. Transportation, refrigeration and other costs took up more than 8 cents of each dollar spent on food in 1988, according to the Food Institute, a nonprofit research organization in Fair Lawn, N.J.
Energy helps produce fertilizer for the farmer. It runs the processing plants and fuels the 20,000 trucks that distribute food daily throughout the nation, according to the National-American Wholesale Grocers’ Assn. in Falls Church, Va.
“Any increase in energy prices is going to be translated ultimately to the cost of food--and it’s pretty obvious they’ve added to the price of energy pretty quickly,” said John R. Block, the association’s president and agriculture secretary in the Reagan Administration.
What sort of increase is brewing? “I don’t think there’s cause for excessive alarm,” Block said. “But anyone who thinks we can see a big jump in energy prices and not feel something, they don’t know how the system works.”
Winner: Nuclear Power Advocates
Iraqi troops had barely rolled into Kuwait when the nuclear power industry began an offensive of its own. The oil shock “calls attention to the importance of domestic energy across the board--and part of that is nuclear,” said Steven W. Unglesbee, a spokesman for the U.S. Council for Energy Awareness, the public affairs organization for commercial nuclear power.
Without nuclear energy, he added, the United States would need another 1 million barrels of oil daily. The organization also spread the gospel by fax machine, supplying media organizations with statistics that support the pro-nuclear side.
While nuclear power remains highly controversial in this country, other nations have been pushing forward in recent years, a process likely to speed up. In Western Europe, the move to nuclear “will just accelerate,” predicted Sidney W. Benson, a professor emeritus of chemistry at USC and specialist in alternative fuels.
Loser: Chemical Companies
Zip-Lock bags, telephones, golf balls, plastic caps, paint and tires are just a few of the products that require oil to produce. Oil is both a raw material in plastics and a source of energy in production. As a result, “if oil goes up $5 a barrel, that will mean an increase of several cents in the cost of raw materials” through the manufacturing process, said Clinton Archer, a spokesman for Du Pont Co. in Wilmington, Del.
What does that mean to consumers? Take antifreeze. More than half the cost of making antifreeze goes to energy, both for oil as an ingredient and fuel for manufacturing. If oil prices stay high, “The cost of production of antifreeze might go up 22%,” said Allen J. Lenz, director for trade and economics at the Chemical Manufacturers Assn. in Washington.
Higher oil prices, he continued, “are going to raise prices and lower demand. So it’s certainly going to have a negative effect.”
Winner: The Oil Patch
It’s hard for outsiders to imagine the wallop suffered by such energy-rich states as Texas, Oklahoma and Louisiana when the price of oil plunged in the 1980s. Hardship spread from the oil fields to real estate, retail stores and services throughout the region. Nationally, the number of independent oil companies skidded from 13,000 in the mid-1980s to just 4,500 today, according to the Independent Petroleum Assn. of America. In Oklahoma alone, 2,400 wells were capped last year as it became uneconomical to operate them.
For these areas, higher oil prices bring the promise of prosperity. “Obviously, if you increase the price of crude oil, you extend the value of those wells,” said Charles J. Mankin, director of the Oklahoma Geological Survey in Norman.
At the same time, residents of the Oil Patch have been burned by past cycles of boom and bust. A genuine resurgence in U.S. energy production will come only when people are convinced that higher oil prices are here to stay. “You can’t just have it for a week,” cautioned James E. Merna, spokesman for the Independent Petroleum Assn. of America.
Loser: The Northeast
For parts of the Northeast and Midwest, the oil shock couldn’t have come at a worse moment. These areas, which rely on outside sources of oil to heat their homes and power their factories, already were coping with an economic slowdown. Higher energy costs threaten a further cutback in spending by consumers and business. Hard-pressed borrowers might repay their loans more slowly.
“A commercial bank in the Northeast--if not already vulnerable--becomes much more vulnerable to problems with profits,” economist Sinai warned.
A 1988 study by the Federal Reserve Bank of Dallas found that in Delaware, for example, every $1 rise in the price of a barrel of crude oil causes employment to fall by almost 1%, or 2,600 jobs.
Westerners may pay a price as well. In California, such a rise could throw more than 12,000 people out of work. And since much of the nation imports more oil today than it did when the study was conducted, many parts of the country “will be even worse off” if oil prices stay high, said Mine K. Yucel, an economist with the Dallas Fed.
Loser: The Dollar
The greenback, goes the truism, is a port in the financial storm, the currency of choice when world conditions turn nasty. Not this time. After Iraq invaded Kuwait, the U.S. dollar mounted a lukewarm rally, but it petered out. Currencies from Germany, Switzerland, Australia and Canada all have looked at least as attractive in recent days.
“We don’t seem to see the same flight to dollars as we have in past years,” said Jeffrey A. Nichols, president of American Precious Metals Advisors, an investment advisory firm in Toronto. “The problems in the U.S. economy are much more apparent than they’ve been in the past.”
The oil shock, in other words, is yet another minus for the U.S. economy, already bedeviled by the budget deficit, heavy private debt loads and sluggish business activity.
Also, in the post-Cold War era, a crisis such as the current oil shock is less likely to spark flights of capital out of Europe, pointed out Robert A. White, a vice president at First Interstate Bank in Los Angeles. When that factor is considered along with America’s financial problems, “it makes it much more difficult to call the dollar a safe haven than in the past.”
Winner: Gold
Unlike the dollar, gold has lived up to its reputation as a safe haven, especially at a time of inflation jitters. Although other precious metals, such as silver and platinum, haven’t been pushed up by the oil shock, gold leaped in value from about $373 an ounce before Iraq’s invasion to more than $385 an ounce by late last week.
“People tend to go to precious metals in an inflationary atmosphere,” explained Nelson B. Colton, president of A-Mark Precious Metals in Santa Monica. Still, gold investors would have liked to see their holdings jump even higher. “I think it’s a lot less than what people would have expected.”
Loser: Real Estate
The housing industry was plenty weak before the crisis, and the ensuing jump in long-term interest rates has done nothing to help. Home buyers now are faced with tricky decisions: Should they wait for mortgage rates to drop? Should they lock in a fixed interest rate? Should they take their chances with an adjustable-rate mortgage?
“If you’re a buyer, you have to reckon with the fact that there’s a lot of uncertainty out there,” noted Lyle E. Gramley, chief economist at the Mortgage Bankers Assn. in Washington and a former governor on the Federal Reserve Board. “It’s a gut-wrenching set of decisions you have to make.”
And the decisions are getting no easier. Since the oil shock, long-term interest rates have mounted an extraordinary upward march. Yields on 30-year U.S. Treasury bonds, for instance, have leaped from under 8.4% up to the 8.8% range as of late last week, and mortgages are following the same trend.
“It’s a shock if you’re in the middle of a transaction right now,” acknowledged Stanford L. Kurland, chief financial officer of Countrywide Credit Industries in Pasadena. But he added: “Tremendous amounts of business have been done at this level in the past.”
Still, higher rates cut into home affordability, already a big issue in Southern California. And if gasoline prices stay high, it might even make fast-growing outer suburbs less attractive to commuters.
Loser: Airline Travelers
Each one-penny increase in the price of a gallon of jet fuel pushes up costs for the airline industry by $160 million a year, according to Airline Economics, a Washington consulting firm. And the potential increase faced by the airlines is far steeper: Airline fuel rises 3.5 cents per gallon for every $1 increase in a barrel of crude.
The airlines have wasted little time in announcing fare hikes. American, Delta, Northwest, Pan Am, Trans World and United are among the carriers that are raising fares in the range of 5% to 10%. Those increases may be just the beginning, however. To recover costs fully and keep up profit levels, the airlines may ultimately have to boost their recent fare hikes a few percentage points further, said George James, chairman of Airline Economics.
Winner: Mexico
Developing nations with oil reserves--such as Mexico, Indonesia, Malaysia and Venezuela--will enjoy an income bonanza of varying amounts.
If crude oil prices hold up, Mexico would gain $1.7 billion by the end of the year, said Rafael Quijano, a director with Petroleum Finance Co., a Washington consulting firm that specializes in Third World issues. “I don’t think anybody would think an extra billion and a half is bad,” he added.
Over time, higher oil prices would give Mexican officials--beleaguered by a $100-billion foreign debt--greater bargaining power with their creditors. An infusion of foreign income would “accelerate the process of recovery of the Mexican economy,” said Jose de la Torre, a professor at UCLA’s John E. Anderson Graduate School of Management.
A notable minus: Mexico will be hurt if higher inflation pushes the U.S. economy into a deep recession. Two-thirds of Mexico’s foreign income comes from non-energy sources such as tourism, agriculture and factory products, Quijano said.
Loser: Auto Industry
It took auto makers 18 months just to begin to recover from the 1973-74 oil shock. As in housing, the current episode came at a time when conditions already were sluggish. “Fears of escalating gasoline prices compound the effects of weaker consumer sentiment upon auto sales,” warns the WEFA Group.
Automotive consultant Thomas O’Grady put things in more down-to-earth terms: “People will say, ‘Wait a second. I think I’ll hold off my purchase for awhile and see which way this is going.’ ” O’Grady, president of Integrated Automotive Resources in Wayne, Pa., added: “If this doesn’t end quickly, it will cause severe pain.”
The severity may vary, however, with Japan-based auto makers suffering less than their Detroit counterparts. Even though the U.S. industry has made strides since the 1970s, when it was virtually dependent on big gas guzzlers, Japan retains the edge in four-cylinder models that combine fuel efficiency with high performance, some experts say. “It would be definitely advantageous to the Japanese,” O’Grady said.
In Limbo: Alternative Energy
Ever since the 1970s, U.S. energy independence has been a popular rallying cry. Moreover, the technology to make liquid or gas energy from coal has improved. The problem, however, is that these methods can’t compete with oil economically until the price per barrel soars to about $40, said USC’s Benson. “They’re just too expensive. They can’t compete with oil at current prices,” he said.
Similar reservations apply to solar, geothermal, wind and other limitless energy sources: They have many advocates in the public, but their appeal is largely lost on profit-oriented corporations. For now, their widespread development remains “unrealistic,” Benson said.
