Rising fuel prices could cramp economic recovery
Consumers are already seeing the fallout from turmoil in the Middle East and North Africa every time they fill their gas tanks. It’s what they don’t see that’s the bigger worry for the U.S. economy.
From the farm to the factory, businesses are facing higher costs to grow the nation’s food, ship goods and manufacture products at a time when they’re already cautious about hiring new employees or placing big orders. The added burden of sustained fuel price increases could slow the nation’s already sluggish economic growth, analysts said.
As the revolt in Libya escalated Wednesday, U.S. benchmark crude cracked $100 a barrel in futures trading before closing at $98.10. That was up $2.68 a barrel from the day before. And it’s up about $13, or 15%, a barrel from one week ago.
“If it proves to be lasting, it could have a negative effect on the recovery,” Jerry Nickelsburg, a UCLA economist, said of the rising price of oil.
Diesel is approaching $4 a gallon in California for the first time since October 2008 and the average price of a gallon of regular gasoline on Wednesday was up nearly a dime from last week, according to the AAA Fuel Gauge Report.
By some estimates, every penny increase at the pump sucks $1.5 billion from household spending nationwide.
“When the price of gasoline goes up, you have less to spend on everything else,” said Bruce Bullock, executive director of the Maguire Energy Institute at Southern Methodist University. “When the price of diesel goes up, the cost of everything else you buy at Wal-Mart and Target goes up: your food, your clothing, everything.”
Rising fuel prices are bedeviling farmers such as Joe Del Bosque. Drought has driven up irrigation costs for the Central Valley farmer over the last few years. He was hoping that recent rains would bring some relief in 2011.
“Now we’re being hit on the other side from the cost of fuel,” said Del Bosque, owner of Empresas Del Bosque, which grows almonds, cantaloupe, cherries and other fruit on a farm in Firebaugh, Calif.
Rising fuel costs are increasing the cost of shipping to get cantaloupe to Del Bosque’s customers. Add rising prices for fertilizer, which is made from petroleum, and Del Bosque said he and other farmers in the Central Valley would be forced to raise their prices. That has him worried that some stores will trim their cantaloupe orders for the busy summer season.
“We sell to chain stores on the East Coast, and if the trucking rates go up too high, they will start to buy less and less,” he said. “They’ll start to try to switch to other types of fruit.”
Shipping companies such as UPS add fuel surcharges to their rates as the price of diesel rises. The UPS fuel surcharge is currently 6% on ground freight and 10% on air freight. Those rates are slated to rise to 6.5% and 11%, respectively, on March 7.
That directly affects businesses such as Tianello, a Los Angeles maker of women’s clothing that is already contending with rising costs of cotton fabric and other textiles.
“Every month UPS comes up with a new surcharge,” said Steve Barazza, chief executive of Tianello. “We have to pass it right on to the customers.”
Travelers will also feel the pain when they fly. Every dollar increase in the price of a barrel of oil costs the airlines $1.6 billion, said Giovanni Bisignani, director general and chief executive of the International Air Transport Assn.
Earlier this week, Southwest Airlines said it would add $10 to the price of roundtrip airfares to offset higher fuel costs. Other airlines have already made similar moves, including Continental, Delta and United and American.
Petroleum is used to make a number of industrial products, including plastics. That’s pinching manufacturers such as Compton’s TAG Toys, which uses plastic components in some of its puzzles and games. The company resumed full production a few months ago after trimming hours during the economic downturn, said Chief Executive Larry Mestyanek. Rising oil prices have given him something new to worry about.
“It adds to the base cost of the product, and that directly affects the price,” he said.
The longer the bulge in prices lasts, the heavier the consequences for households, which could trim their spending on other things, said Amy Myers Jaffe, senior energy analyst and professor at Rice University’s James A. Baker III Institute for Public Policy.
“If the turmoil goes on for many more weeks, consumers will retrench much more, and for a longer period of time,” she said.
Edward J. Evans Jr. of Altadena, who runs a lawn maintenance and gardening service, is already cutting back. He recently lost some clients who said they were worried about the economy. Evans now tries to schedule jobs only three days a week to save fuel costs.
“I’m saving my money because I don’t know where this economy is going to be taking me anytime soon,” said Evans, 50, who supports three daughters and a son.
White House Press Secretary Jay Carney said the Obama administration was concerned about rising oil prices and monitoring the situation “very carefully.”
On Wednesday, a gallon of regular gasoline averaged $3.19 nationwide, up 6 cents from the week before. In California, a gallon of regular averaged $3.58, up nearly 10 cents, according to the AAA Fuel Gauge Report. Nationwide, diesel averaged $3.58 a gallon, up 4 cents from a week ago. In California, a gallon of diesel averaged $3.90, up almost 7 cents a gallon.
Diesel last topped $4 a gallon in California in October of 2008 and broke the $5-a-gallon mark in May of 2008. It remained above $5 a gallon through July 2008.
Volatile fuel prices have some businesses looking to make permanent adjustments to their operations. On Tuesday, UPS announced it had purchased 48 heavy tractor trucks that will run on liquefied national gas in western states, including California. The BNSF railroad has acquired 2,700 fuel-efficient locomotives over the decade.
Charles R. Diaz Trucking Inc. of Fresno instructs its long-haul drivers to fill up where fuel is cheapest, such as Arizona and Oklahoma.
Candace Mahdessian, owner of Jasmine’s Garden, a Silver Lake florist, said she’s going to absorb higher fuel costs for now rather than pass them along to her customers.
“Somewhere along the line of doing business, it evens out,” she said. “Fuel costs are up, but we’re used to that, being in L.A.”
Staff writer Jim Puzzanghera in Washington contributed to this report.
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