Fuel Prices Not Driving the Economy

This summer’s abrupt drop in fuel prices is welcomed by everyone from the freeway commuter to the pizza-delivery driver to the president of United Airlines. And just as soaring fuel costs helped slow the U.S. economy, lower prices are expected to help rekindle economic growth later this year.

But not much. The benefits of declining prices for gasoline, diesel fuel, jet fuel, natural gas and crude oil are not expected to be dramatic. A looming tax rebate for Americans and the repeated interest rate cuts by the Federal Reserve will play much bigger roles in reviving the economy, analysts say.

Fuel prices remain relatively high even with the recent declines and are expected to affect consumer spending and fuel-reliant industries such as transportation and power generation.

“Compared with historical levels, the price for jet fuel is still high” at roughly 79 cents a gallon, even though it has dropped from nearly $1 a gallon last winter, said Greg Rossiter, a spokesman for FedEx Corp. In July 1999, the price was 52 cents a gallon.

The package delivery giant, which runs a global fleet of 640 aircraft and 94,000 vehicles, recently reported a 54% plunge in profit for its fiscal fourth quarter ended May 31, in part because of bigger outlays for fuel.

Although they’ve enjoyed some relief, California motorists pay the highest gasoline prices in the country--an average of $1.83 a gallon for self-serve regular--and those prices could start climbing in coming months.

One reason: The state is making plans to start using ethanol as an emissions-reducing additive in gasoline, to replace MTBE, an additive that’s being phased out. The switch, and potentially tight supplies of ethanol, could lift pump prices in California.

Consumers continue to help cover the transportation industry’s fuel costs. Big fuel consumers such as FedEx say they have no plans to repeal surcharges that they began imposing on customers a year ago. FedEx has surcharges of 4% on express shipments and 1.25% on ground deliveries to help offset higher fuel costs.

“We constantly reconfigure our route structure to minimize fuel burn and operate our network as efficiently as we can, but there are limits to that,” Rossiter said. “There is no substitute for lower-cost fuel.”

With crude oil selling for about $27 a barrel, “we’re a lot better off than had prices stayed at $35 a barrel, but a lot worse off than if they had stayed at $12, where they were two years ago,” said David Wyss, chief economist at Standard & Poor’s Corp.

It will take time for some industries to recover from the damage incurred by the surge in fuel costs that peaked earlier this year.

Airline Industry Feels the Squeeze

The major airlines are expected to post a combined second-quarter loss of about $360 million, in part because of bigger payouts for jet fuel compared with a year earlier.

Many airlines hedge part of their fuel costs by buying contracts that lock in a portion of their fuel at prearranged prices. But it hasn’t been enough to completely offset the increasing prices.

And it won’t be easy for the airlines to keep passing on higher costs to consumers in the form of higher fares--as they did when the economy was stronger. Airlines are hurting from a drop in passenger traffic, and raising fares would exacerbate the problem, analysts said.

The result: “Airline profits get squeezed or their losses get expanded,” said Philip Roberts, chairman of Roberts, Roach & Associates, an industry consulting firm in Hayward, Calif. “They’re trying to fill empty seats, and you don’t do that by raising fares.”

High jet-fuel prices “come at a bad time, because the economy is not growing in a robust manner and the carriers are seeing their premium travelers, the business passengers, not travel as much,” Roberts said.

Also hard-hit is the trucking industry. Although consisting mostly of small, independent operators, it consumes 43 billion gallons of gasoline and diesel fuel each year. Fuel prices and the weakened economy probably will result in a record number of trucking firms going out of business this year--surpassing last year’s record of 3,670 failures, said analyst Donald Broughton of the investment firm A.G. Edwards & Sons in St. Louis.

The recent pullback in diesel prices “will bode well for those that survived,” but the decline may not have come soon enough for some trucking companies that, though still on the road today, probably won’t survive the losses they’ve already suffered, he said.

“It’s like running in front of the bulls in Pamplona,” he said. “Once you’ve been gored, you’re still going to bleed. For a lot of the smaller players, the damage has been done.”

Lower Fuel Bills May Aid Recovery

Others expect to rebound with the help of lower fuel bills. “Hopefully it will now get better,” said Gene Hauck, president of the Los Angeles division of SuperShuttle, the airport transportation provider. When prices soared this spring, “it hurt us,” he said. “It wasn’t critical, but it certainly was painful.”

SuperShuttle was hit by a double whammy. The privately held company, which has 1,800 vehicles nationwide--including 280 in Southern California--four years ago launched a program to convert its fleet to burn natural gas instead of gasoline. Natural gas was expected to be cheaper than gasoline on a gallon-equivalent basis.

But as natural-gas prices soared to unprecedented heights this winter--especially in California--”it undermined a good portion of the rationale we had when we made the conversion,” Hauck said. At the same time, SuperShuttle was getting slammed by soaring gasoline prices.

That’s why SuperShuttle, whose average one-way fare in Southern California is $15, began levying a 15% surcharge about a year ago. “If we believe [fuel] prices have stabilized, we may be able to roll that back,” Hauck said.

Now the company’s conversion of its vehicles is being mandated by California regulators, who are requiring some transportation fleets to switch to natural gas. About 50% of SuperShuttle’s Southern California fleet burns natural gas, and the conversion will be completed within two years, Hauck said.

Consumers, though, are dependent on gasoline, and economists will be closely watching how much consumers spend in coming months--especially after motorists get their tax rebates later this year.

“We think people will rush out and spend the money,” said Wyss of Standard & Poor’s. The question, he said, is whether they’ll spend a chunk of it on more vacations or new cars or in any other way that would drive up fuel demand and give the economy a bigger boost than expected.

But with gasoline prices falling again, it’s a safe bet that consumers won’t drive less. “In the short run,” Wyss said, “people are pretty insensitive to gasoline prices.”

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Fitful Fuel

After surging to record highs, prices of major fuels have turned down, giving some relief to motorists and industry, especially transportation companies. But prices remain historically high. Here are per-gallonprices forgasoline, diesel fuel and jet fuel: Sources: Energy Information Administration, Air Transport Assn.