Cost of oil felt beyond pump
Nationwide fuel costs surged again in the last week, the Energy Department said Tuesday, pushing prices higher than they’ve ever been at this time of year.
Analysts warn that gasoline prices soon will rise by as much as 20 cents a gallon -- which would put California’s average at nearly $3.50. And it’s not just gasoline. High oil costs are trickling through the economy, pushing up the price of food, airline flights and cruises as well as retail prices for a host of products derived from crude oil and its byproducts.
Oil had been steadily cruising toward $100 a barrel but took an unexpected U-turn Tuesday, plunging more than $3 a barrel in New York futures trading as worries mounted that the long, painful climb in energy prices had cut into consumer budgets, weakening demand and the U.S. economy.
More price hikes are on the way, because the cost of gasoline, diesel and other products has yet to fully reflect oil’s more-than-40% price jump since late August -- a gloomy thought for consumers already struggling to offset their rising gasoline tab while getting ready for the holiday spend-fest.
“Normally, demand goes down at the end of the year, prices go down and we don’t even think about it,” said Phil Flynn, senior market analyst for Chicago’s Alaron Trading Corp. “But now the gas prices are catching up to the high cost of crude and they still have a way to go yet.”
That’s disturbing news for composer Garry Schyman, who stopped for a fill-up at a Culver City Arco station Tuesday.
“I put $25 into my tank last night and got about seven gallons, which is ridiculous,” said Schyman, who wrote original music for the recently released video game “BioShock.” “I just looked at it and laughed. It is frustrating.”
In California, the average cost of regular gasoline rose 13.5 cents in the last week to $3.366 a gallon, an increase of more than 90 cents compared with the year-earlier price, the Energy Department said Tuesday. The nationwide average increased 9.8 cents to $3.111, nearly 88 cents above last year’s levels. Both are below the record-high averages hit in May.
On Monday, the Energy Department warned that fuel prices could jump 20 cents a gallon in the coming weeks to match the recent oil increases.
On Tuesday, concerns about slackening demand caused the price of U.S. benchmark crude oil to fall $3.45, or 3.7%, to $91.17 a barrel, a retreat from last Thursday’s record high of $98.62 a barrel.
The downturn wasn’t enough to cheer Nigel Gault, chief U.S. economist with Global Insight Inc., a forecasting company in Lexington, Mass.
“Given what’s happened with oil recently, any move down is good news . . . but it’s not going to make a lot of difference to the price at the gasoline pump,” Gault said.
“People are not operating with a big cushion here, especially at the lower end of the income scale,” he said. “It’s not good to start the shopping season with consumer sentiment having dropped into a zone that’s normally associated with a recession. It’s going to be a tough holiday season for retailers.”
The effect of higher pump prices is already showing up in household budgets, but the pain varies widely across the country, according to a 3,000-county survey completed Monday by Oil Price Information Service, a New Jersey company that tracks energy markets.
In relatively high-wage counties such as Orange and Los Angeles, with median incomes of $63,747 and $45,700, respectively, the increase wasn’t so prominent. The percentage of household income devoted to one vehicle’s fuel rose from 1.9% in 2002 to 3.6% currently in Los Angeles, and from 1.5% to 2.6% in Orange, the survey said.
In the Deep South, where the cost of fueling a vehicle took at least a 10% bite out of household income, Michael Wesely Garner Sr., 46, has cut back on air conditioning and other household appliance use. Garner’s family in Mobile, Ala., also has combined household errands to reduce trips.
“Economically, we just can’t afford for prices to go much higher,” said Garner, a test development director for the Northrop Grumman Ship Systems Ingalls Shipyard in Pascagoula, Miss., who regularly monitors prices through the website Gasbuddy.com.
Analysts cautioned that record gasoline prices could lurk on the horizon. And oil prices could change direction again, given the market’s volatility this year.
“The sad part is that these prices are the launching pad for the price spikes we get every spring,” said Fred Rozell of Oil Price Information Service. “If they remain this high, it will be a real mess.”
Over the last few years, escalating energy costs were partially offset by the strong housing market, which allowed homeowners to take on more debt and keep spending. Then home prices tanked, mortgages soured and consumers lost the cheap credit that was helping them cope with expensive gasoline and other costs.
This latest crunch has cut into fuel demand, which had been climbing for years. In California, where the average cost of gasoline was above $3 a gallon for long stretches this year and last, gasoline consumption has fallen for the last five quarters. Gasoline usage nationwide is faltering too.
“The prices have had an impact on end-user behavior,” said Mike Waldron, an energy expert at Lehman Bros. “We’ve seen evidence in the weekly data that . . . year-over-year growth in transport fuel demand is coming out weaker and weaker.”
That point was underscored by the International Energy Agency, which Tuesday lowered global oil demand estimates for 2008, citing sluggish growth and a teetering economy in the U.S.
Some corporations are coping with high energy prices by pinching costs elsewhere or by making their operations more efficient. Others have been hitting their customers with price hikes.
The cost of tires has soared over the last few years, reflecting higher prices for natural rubber and oil-based products such as synthetic rubber and carbon black, used to reinforce and blacken tires.
Akron, Ohio-based Goodyear Tire & Rubber Co., which has seen its raw materials costs more than triple between 2004 and 2006, has pushed to sell more high-margin tires and has launched a cost-cutting initiative that it hopes will save the company as much as $2 billion by the end of 2009. In addition, Goodyear has raised its prices on U.S. consumer tires 10 times since May 2004, spokesman Keith Price said.
American Airlines has been chipping away at the weight and drag of its planes to cut jet fuel consumption. Under a campaign it calls “fuel smart,” the company said it was saving 95 million gallons of fuel a year. Last month, the airline said it would introduce lighter beverage carts, cutting fuel use by 1.8 million gallons a year, or more than $4 million at recent jet fuel prices.
Carnival Corp., the world’s largest cruise operator, this week launched a daily fuel charge of $5 a person for North American cruise lines.
“We’re seeing it in a lot of different products. We’re seeing it in plastics and agricultural chemicals. In transportation costs,” Wachovia Corp. senior economist Mark Vitner said of the high energy costs.
“It’s not something that’s threatening to wreck the economy,” he said. On the other hand, “we’re not going to get out of this unscathed.”