High Energy Prices Still Threaten Economy
Friday October 7, 10:43 pm ET
Fuel Demand Falls After Hurricanes, but High Energy Prices Still Threaten Economy
Capitol Trailways recently doubled the number of buses it runs on weekends from King of Prussia, Pa., to New York City, suggesting to company president Joshua Bennett that the sign he put in front of the station is working. It says: "Sky high gas prices? Commute to NYC on the bus."
There's growing anecdotal and statistical evidence that soaring fuel costs are altering behavior -- from a sharp decline in SUV sales to a late-summer surge in bicycle sales to government data showing a 3 percent drop in gasoline usage last month.
Yet even though gas prices may drop due to the weaker demand, home-heating costs are expected to surge this winter and that may force consumers, especially the poor, to cut spending on clothing, health care and food.
Waiter and actor Greg Foshay of Studio City, Calif., said he bikes and walks as much as he can and even started riding the train a year and a half ago to save money on gas, which averages $2.93-a-gallon nationwide. But he still drives to auditions.
"My Ford Ranger has a 20-gallon tank, but I haven't filled it up all the way in years," Foshay said. "It's too much of a hit."
Some energy-intensive industries are also trying to cut back:
-- AMR Corp.'s American Airlines is flying fewer routes and other carriers are expected to do the same. Jet fuel purchased on the spot market in New York now costs $2.41 a gallon, or about 60 percent more than last year.
-- The CEO of Dow Chemical Co. testified in Congress earlier this week that Dow and its competitors, which are highly dependent on natural gas as a feedstock and an energy source for their plants, were shutting down some U.S. plants. Natural gas futures are almost double year ago levels at more than $13 per 1,000 cubic feet.
-- Charter buses are taking the unusual step of canceling trips if they cannot fill 55-seaters at least half way. "It's a matter of how much you're willing to lose," said Doug Anderson, president of Anderson Coach and Travel in Greenville, Pa., which in the past would shuttle as few as 20 passengers to destinations such as Atlantic City, Branson, Mo., and Washington, D.C.
It is too soon to tell whether the pullback in energy demand is more than a short-term response to the price spikes after hurricanes Katrina and Rita. But the shifting winds -- including repeated calls for energy conservation by the Bush administration -- are already being reflected on energy markets.
Crude oil for November delivery fell 7 percent this week, settling Friday at $61.84 per barrel, while gasoline futures plunged 14 percent this week to finish at $1.8292 per gallon.
"Katrina really increased the anxiety about gasoline prices in the U.S. and calls for conservation only add to that," said James Burkhard, global oil director at Cambridge Energy Research Associates in Cambridge, Mass.
Burkhard cautioned against drawing firm conclusions from Energy Department data that show gasoline consumption over the past four weeks was 2.6 percent below year ago levels.
Back-to-back hurricanes caused severe, but mostly temporary, disruptions to daily routines along the Gulf Coast. And residents in other parts of the country may gradually fall back into their old driving habits as average U.S. pump prices recede further from $3-a-gallon.
"People need to drive to work, take their kids to school, go to the store and so forth," Burkhard said.
There are signs, however, that Americans are rethinking the way in which they get around.
Several automakers said this week that sales of sport utility vehicles declined sharply in September, in part because of high gas prices. Sales of the GMC Envoy and Chevrolet Tahoe fell more than 50 percent compared with a year ago.
And a national coalition of bicycle suppliers and retailers says it is no coincidence that there was a big bump in sales toward the end of summer -- around the same time that gasoline prices surged. "At the retail level, they're seeing new customers, not avid cyclists," said Tim Blumenthal, executive director of Bikes Belong. "Now the question becomes 'How long does it last?'"
Of course, for many Americans, the cost of gasoline may soon seem like a relatively small burden on their budgets compared with the cost of heating a home.
The slow recovery of Gulf Coast energy production in the aftermath of Katrina and Rita is putting a serious strain on natural gas and heating oil supplies. Economists worry that homeowners may be unpleasantly surprised when their first winter utility bill arrives.
The Energy Department estimates that the average household in the Midwest this winter will see its natural gas bill rise by 71 percent, or $600, while a heating oil customer in the Northeast will see a jump of 31 percent, or $400. Total U.S. spending on energy in 2005 is expected to rise by 24 percent to more than $1 trillion, according to the Energy Department.
"If we have colder-than-normal weather, we'll see a bit of a shock to the economy," said Antoine Halff, director of global energy at Eurasia Group in New York. He added: "I plan to put a sweater on at home."
The financial pinch will be greatest, as always, on lower income families. Studies have shown that the poor sometimes forgo health care, food and other basic necessities just to keep their homes warm each winter.
Americans living at or below the median income level will also struggle, economists said, and they expect a dropoff in consumer spending this winter that could take $100 billion out of the pockets of the nation's retailers.
"Consumers are wearing this year what they wore last year," said retail analyst Burt Flickinger of Strategic Marketing. "We're already seeing a slowdown in apparel and accessories and that's a pretty bad barometer going into the winter season."
Engineering News Archive