Impact of higher oil, product prices on US economy deepens

April 21, 2008
There are growing indications that high gasoline and diesel fuel prices are having an increasingly adverse impact on the general US economy, and federal lawmakers have started to respond.

There are growing indications that high gasoline and diesel fuel prices are having an increasingly adverse impact on the general US economy, and federal lawmakers have started to respond.

US Sens. Maria Cantwell (D-Wash.) and Olympia J. Snowe (R-Me.) urged the Federal Trade Commission on Apr. 8 to use new regulatory authority it received as part of the 2007 Energy Independence and Security Act to prevent oil market manipulation. Two days later, House Republicans used floor debate on a beach protection bill to charge Democrats with not taking meaningful action in response to high gasoline and diesel prices.

Government statistics suggested that energy prices climbed more quickly in March. Wholesale prices for finished energy goods grew 2.9% during the month after increasing only 0.8% in February, the US Bureau of Labor Statistics said Apr. 15 in its latest Producer Price Index (PPI). More than half of the acceleration came from the survey’s liquefied petroleum gas (LPG) index, which jumped 4.2% in March after dropping 9.7% a month earlier. The increase led to a 1.1% rise in the PPI for finished goods in March following growth of 0.3% in February and 1% in January, BLS said.

Prices for home heating oil and kerosine also rose last month after falling in February, while the indexes for diesel fuel and asphalt rose farther than in the previous month, according to the PPI. “Conversely, partially offsetting the acceleration in finished energy goods prices, the rise in the index for gasoline slowed to 1.3% from 2.9% in February. Prices for residential natural gas also rose less than a month earlier,” the latest PPI said.

Bigger increases

But the energy price increases in March were greater further up the wholesale chain, according to the report. It said the index for intermediate energy goods climbed 5.9% last month following a 1.1% gain in February. “Leading this acceleration, the index for diesel fuel surged 15.3% after rising 0.9% in February. Prices for jet fuel, residential fuel, LPG, electric power, and home heating oil turned up in March,” it said.

Gasoline prices slightly offset acceleration of the intermediate energy goods index by advancing 1.3% in March, compared with a 2.9% increase in February, the report continued. The utility natural gas index rose less than it did the previous month, it added.

For crude energy materials, March’s PPI showed a 13.4% jump in the index following a 5.6% advance in February. It traced the bigger increase to a 17.5% jump in crude oil prices which followed a 0.6% rise a month earlier. Natural gas prices advanced slightly less than in February (11.4% compared with 11.5%) within the crude energy price index, it said.

Crude oil prices were the biggest uncertainty as the US Energy Information Administration issued its latest monthly short-term energy outlook Apr. 8. It said prices for West Texas Intermediate crude, which averaged $72.32/bbl in 2007, are projected to average $101/bbl in 2008 and $92.50/bbl in 2009.

“Based on the projections of weak economic growth and record high crude oil and product prices, consumption of liquid fuels and other petroleum products is projected to decline by 90,000 b/d in 2008 (a sharp reversal from the 40,000 b/d increase projected in the previous outlook), then increase by 200,000 b/d in 2009,” EIA said. It forecasts that high retail prices and the current economic slowdown will reduce gasoline consumption by 0.4% to 9.4 million b/d during the summer driving season. Demand for distillate fuel, which includes diesel fuel and home heating oil, is not expected to change year-to-year, it said.

Consumer responses

Most consumers in 16 Midcontinent states are responding to higher motor fuel prices by driving less, according to Vincent F. Orza, dean of the Meinders School of Business at Oklahoma City University. The school’s regular regional consumer sentiment survey also found in March that they were less inclined to buy durable household goods, while more believed their financial situation is worse than a year ago, he told an Apr. 9 hearing of the House Small Business Committee’s Oversight and Investigation Subcommittee.

“At $3/gal, consumer discretionary income declines enough to impact the frequency of eating at quick service and casual theme restaurants, which alone are reported to have lost more than 10% of their customers. Soft good purchases at chain stores (many operating as small business franchises) and thousands of independent merchants are down along with ticket sales at movie theaters. This is a consequence of higher [gasoline] prices reducing the number of discretionary dollars,” Orza explained.

Both major and independent retailers are closing outlets as a result, he continued. “Liz Claiborne is shuttering 54 Sigrid Olsen stores. Ann Taylor is closing 117 of its 921 stores. Talbot’s has closed all of its men’s and children’s clothing stores along with 22 women’s stores. Even Target and Starbucks are seeing a slowdown. Each of these chains are served by countless small businesses that provide window washing and custodial services, paper products, deliveries, alterations and many other services,” he said.

The University of Michigan’s Institute of Social Research, which conducts a better-known survey of consumer attitudes with Reuters, said more households reported in March that their financial situation had grown worse than at any time since 1991, and more consumers cited high fuel and food prices as the main cause of their financial distress than at any time since 1982.

“Unlike the more widely shared experiences of a quarter century ago, lower income households have reported financial distress due to high fuel and food prices twice as frequently as upper income households,” said Richard T. Curtin, who directs the monthly survey.

Orza told the House subcommittee that there is no short-term or easy solution to high gasoline prices. More exploration and refinery capacity would help, but government regulations and prohibitions make both more difficult, he said. “There is one quick fix that would benefit consumers and small business owners,” he continued. “Congress could reduce federal fuel taxes, which would have an immediate positive impact of about 50¢/gal and would be quicker and easier than mailing rebate checks to 700 million households.”