About this series
This is the first in a series of occasional articles looking at how skyrocketing oil prices are transforming lives in Southern California and around the world.
The more expensive oil gets, the more Katherine Carver’s life shrinks. She’s given up RV trips. She stays home most weekends. She’s scrapped her twice-a-month volunteer stint at a Malibu wildlife refuge -- the trek from her home in Palmdale just got too expensive.
How much higher would fuel prices have to go before she quit her job? Already, the 170-mile round-trip commute to her job with Los Angeles County Child Support Services in Commerce is costing her close to $1,000 a month -- a fifth of her salary. It’s got the 55-year-old thinking about retirement.
“It’s definitely pushing me to that point,” Carver said.
The point could be closer than anyone thinks.
Three months ago, when oil was around $108 a barrel, a few Wall Street analysts began predicting that it could rise to $200. Many observers scoffed at the forecasts as sensational, or motivated by a desire among energy companies and investors to drive prices higher.
But with oil closing above $140 a barrel Friday, more experts are taking those predictions seriously -- and shuddering at the inflation-fueled chaos that $200-a-barrel crude could bring. They foresee fundamental shifts in the way we work, where we live and how we spend our free time.
“You’d have massive changes going on throughout the economy,” said Robert Wescott, president of Keybridge Research, a Washington economic analysis firm. “Some activities are just plain going to be shut down.”
Besides the obvious effect $7-a-gallon gasoline would have on commuters, automakers, airlines, truckers and shipping firms, $200 oil would drive up the price of a broad spectrum of products: Insecticides and hand lotions, cosmetics and food preservatives, shaving cream and rubber cement, plastic bottles and crayons -- all have ingredients derived from oil.
The pain would probably be particularly intense in Southern California, which is known for its long commutes and high cost of living.
“Throughout our history, we have grown on the assumption that energy costs would be low,” said Michael Woo, a former Los Angeles city councilman and a current member of the city Planning Commission. “Now that those assumptions are shifting, it changes assumptions about housing, cars and how cities grow.”
Push prices up fast enough, he said, and “it would be the urban-planning equivalent of an earthquake.”
With every penny hike in the price of gas costing American consumers about $1 billion a year, sharply higher pump prices would lead to “significant bankruptcies and store closings,” said Scott Hoyt, director of consumer economics at Moody’s Economy.com.
Consumer spending has held up surprisingly well in the face of skyrocketing pump prices -- bolstered in part, perhaps, by federal tax rebates. But the same day the government reported a 0.8% rise in May consumer spending, a research firm said consumer confidence had plunged to its lowest level since 1980 -- hinting at the catastrophic effect another big gas price surge could have on retailers and customers.
“The purchasing power of the American people would be kicked in the teeth so darned hard by $200-a-barrel oil that they won’t have the ability to buy much of anything,” said S. David Freeman, president of the L.A. Board of Harbor Commissioners and author of the 2007 book “Winning Our Energy Independence.”
BIGresearch of Worthington, Ohio, said more than half of Californians in a recent survey said they were driving less because of high gas prices. Almost 42% said they had reduced vacation travel and 40% said they were dining out less.
If any retailers would benefit, it would be those on the Internet. In a recent survey by Harris Interactive, one-third of adults said high gas prices had made them more likely to shop online to avoid driving.
Restaurant operators such as Brinker International, which owns the Chili’s and Romano’s Macaroni Grill chains, are suffering and are likely to struggle even more as consumers look for ways to reduce spending. Fast-food chains wouldn’t be immune, experts say, although they might fare better as families downscale their dining choices.
Vehicle sales, too, would probably continue to tank. Sales of new cars, sport utility vehicles and light trucks fell more than 18% in California in the first quarter compared with a year earlier. Although some consumers have been shopping for smaller, more fuel-efficient vehicles, many dealers are demanding premiums for gas-sipping hybrids, wiping out much of the financial advantage of buying one.
Nationwide, $200 oil and $7 gasoline would force Americans to take 10 million vehicles off the roads over the next four years, Jeff Rubin, chief economist at CIBC World Markets, wrote in a recent report.
As for the state’s beleaguered housing market, prices are falling faster in areas requiring long commutes -- such as Lancaster and Palmdale -- than in neighborhoods closer to job centers.
Sky-high gas prices “would basically reorient society to where proximity would be more valuable,” said Tom Gilligan, finance professor at USC.
Americans may also feel the effects of a rise in energy-related crime. Ads for locking gas caps are becoming more prevalent. Restaurant owners are complaining that thieves are helping themselves to used barrels of cooking oil, which can be home-brewed into biodiesel fuel.
Workers stuck with long commutes and gas-guzzling cars would look increasingly to public transit, experts say.
Already Californians’ mobility is being curbed. Traffic on the state’s freeways fell almost 4% in April compared with a year earlier, and ridership on many subway and bus lines operated by the L.A. County Metropolitan Transportation Authority has risen in recent months.
But a huge influx of riders would strain aspects of the system, MTA says, noting that many buses are overcrowded at rush hour now.
Quickly adding capacity to meet demand from new riders wouldn’t be easy, because new buses cost hundreds of thousands of dollars and take up to two years to deliver.
Transit advocate Kymberleigh Richards said new riders on popular routes such as Wilshire Boulevard, Vermont Avenue or Sherman Way in the San Fernando Valley “are going to have a bit of a culture shock. It’s a different world to be using public transit when you’re used to being in your own vehicle by yourself.”
Just how many drivers would become public-transit riders if oil surges to $200 a barrel is hard to predict, but there’s a big pool of potential customers. About 87% of Southern Californians commute by car, according to 2005 data from transportation expert Alan Pisarski. That compares with 63% in New York and its environs.
Travelers can also expect much fuller airplanes and much more expensive flights -- when they’re available at all. Delta Air Lines Inc., for example, recently said it was cutting about 13% of its flights from Los Angeles International Airport to save fuel.
It also could mean shifting flights from outlying airports such as Ontario to LAX to cut overhead costs, said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. Carriers probably would also trim flights in highly competitive air corridors such as L.A. to the San Francisco Bay Area.
Even the cost of getting away from it all on Santa Catalina Island would go up. Greg Bombard, president of the Catalina Express ferry service, has trimmed schedules, raised fares and reduced hiring to make up for fuel costs that have risen sevenfold since 2002. Another big increase and he says he’ll have to ask state regulators, who control his rates, to OK another fare hike.
The fee increases on the ferry would be nothing compared with the added cost of transoceanic shipping if oil goes to $200. Some experts say high energy costs are altering global trade and slowing the pace of globalization.
It takes about 7,000 tons of bunker-fuel to fill the tanks of a 5,000-container cargo ship for a trip from Shanghai to Los Angeles. Over the last year and half, the cost of that fuel has jumped 87% to $552 a ton, according to the World Shipping Council, boosting the cost of a fill-up to more than $3.8 million.
“To put things in perspective, today’s extra shipping cost from East Asia is the equivalent of imposing a 9% tariff on East Asian goods entering North America,” said Rubin of CIBC World Markets. “At $200 per barrel, the tariff equivalent rate will rise to 15%.”
If oil continues to rise from current levels, officials at the Port of Los Angeles believe West Coast ports would gain business because they are 10 to 12 days’ sailing time from Asia, versus the 18-to-20-day route from Asia to the East Coast through the Panama Canal.
But local ports could lose business if shipping costs get so out of hand that companies begin shifting production back to North America from Asia -- something that’s happening in the steel industry, Rubin said.
Local distribution patterns could change too. Stephen Gaddis, chief executive of Pacific Cheese Co., a Hayward, Calif., cheese processing and packaging firm, thinks high fuel prices will push restaurants, retailers and food manufacturers to look for suppliers closer to their operations.
“Local sourcing is ideal. You won’t pay as much for freight, and when you use less fuel it’s better for the environment,” Gaddis said.
Soaring diesel prices will make companies rethink whether they should have large, centralized plants or build smaller ones around the country.
That’s what Pacific Cheese is doing. It’s building a packaging plant in Texas to be closer to one of its larger suppliers and expects to serve its Southwestern clients from there.
In the near future, however, consumers can expect to pay for the higher cost of producing food and moving it around the country, say food executives, farmers and economists. Even having a deep-dish pizza with extra cheese brought to your door costs more now that chains such as Pizza Hut are charging for delivery.
Dramatically higher transportation costs would usher in an era of virtual mobility, or zero mobility, for many workers.
“We’re seeing companies go to four-day workweeks, place increased emphasis on working at home, show bigger interest in setting up satellite offices -- anything that gets commute times down and gets people off the road,” said analyst Rob Enderle of Enderle Group in San Jose.
Videoconferencing, touted as “the next big thing” for years, would finally have its day, thanks to improved technology and a desperation to cut corporate travel budgets.
Telecommuting, or working from home, is easier than ever because of the spread of high-speed Internet access, said Jonathan Spira, chief analyst at Basex Inc., a business research firm in New York. In particular, workers in “knowledge” jobs that can be performed with computers and phones would benefit.
But Gilligan of USC noted that lower-income workers tend to be in jobs that don’t favor telecommuting, such as retail and food service.
“These are the same people who are already being creamed by the mortgage crisis,” he said. “The impacts of energy price increases are highly disparate.”
Although white-collar workers may be able to telecommute, they could also take a serious financial hit because soaring energy prices tend to wreak havoc on the stock market. The explosion of 401(k) plans and similar retirement accounts in the last few decades -- and the decline of traditional pensions with guaranteed payouts -- have tied workers’ financial futures more closely to stocks than they were during the 1970s oil shocks. A prolonged Wall Street downturn could mean a no-frills retirement, or none at all.
It wouldn’t all be bad, of course. Some industries could boom, providing jobs and tax dollars. California has seen a jump in drilling activity as oil companies try to extract more crude from the state’s fields. Regulators expect a record 4,000 wells to be drilled in the state this year.
“Every rig and every crew that’s available is working right now,” said Hal Bopp, the state’s oil and gas supervisor.
And as rising oil prices make alternative-fuel vehicles more cost-effective, California companies such as Tesla Motors Inc., which recently began production of a $100,000 all-electric sports car, could become important leaders in an emerging industry.
Tourist attractions may also see an upswing in local business as families look for less-expensive vacation alternatives close to home. A recent survey by travel insurer Access America found that 26% of Americans would cut back on recreational travel as a first response to higher gas prices.
In Southern California, with its many natural wonders, theme parks and other attractions, the prospect of a “staycation” may be less disappointing than for a resident of, say, Nebraska. And movies, a staple of the local economy, may prosper as Americans seek escapism and a (relatively) cheap night out.
And spending less time stuck in traffic on the 405? Priceless.
“More carpooling, fewer people on the freeways, more telecommuting -- in many ways, what would happen is what people have been trying to make happen for a long time,” USC’s Gilligan said.
About this series
Coming next: How the boom in crude prices is bolstering autocratic governments in some oil-rich countries, emboldening them to challenge U.S. objectives and weakening democratic movements.
Times staff writers Ken Bensinger, Leslie Earnest, Jerry Hirsch, Peter Pae and Ronald D. White contributed to this report.
Wall Street: Stocks move to the threshold of bear territory. Business, C1
Market Beat: Downturn may be long, Tom Petruno writes. Business, C1