Remember when predictions of $50-a-barrel oil seemed far-fetched? Last week, prices briefly touched $60 a barrel and the far-fetched predictions are now about prices hitting $70 a barrel, and even higher.Posted on 06/26/2005 2:38:47 PM PDT by M. Espinola
Remember when predictions of $50-a-barrel oil seemed far-fetched? Last week, prices briefly touched $60 a barrel and the far-fetched predictions are now about prices hitting $70 a barrel, and even higher.
The talk about energy costs is no longer "When will prices come down?" but "How high will they go?"
As the price of oil climbs, so do prices for many commodities, led by gasoline, which moves up and down in lockstep with oil. Electricity and natural gas prices likely would follow oil, as would goods made from petroleum such as plastics. Food, too, would go up because of higher production and transportation costs.
All of this drives up the cost of doing business in an economy where passing along costs isn't a sure bet. Just ask airlines, which are still expected to lose billions of dollars despite the busiest summer travel season since 2000.
And higher prices are already beginning to change the behavior of consumers. Look at Ford and General Motors, two companies facing dealer lots filled with large, gas-hungry trucks and sport utility vehicles as car buyers look at more fuel-efficient alternatives.
THE UPSIDE
To be sure, the effects of rising prices aren't all bad.
"There's always sort of the tendency to make dire predictions," said Terry Roe, a professor of applied economics at the University of Minnesota.
But in reality, economic shocks such as surges in energy costs have positive effects and negative effects. High oil and gasoline prices in the late 1970s and early 1980s stung consumers, but they also led to more efficient air conditioners and furnaces. While it's difficult to predict, this time around we might see innovations as high-tech as hydrogen fuel cells or as low-tech as smaller homes.
Rising oil prices "create opportunities for others in the economy," Roe said.
Crude oil prices are running about 50 percent higher than a year ago, partly because of rising demand from the U.S. and fast-growing economies in China and India. Meanwhile, the supply of oil has been tight. Traders have been concerned about unrest in the Middle East, the world's major supplier, and other oil-producing countries such as Nigeria.
Traders, including high-profile types such as Boone Pickens, continue to expect price increases. Even when short-term political worries fade, demand shows no sign of tapering off. Contracts for oil to be delivered in November are above $60 a barrel.
All of this is good news for places like western North Dakota and eastern Montana, where increased production and exploration in oil fields have created a bit of an economic boom, said Toby Madden, an economist with the Federal Reserve Bank of Minneapolis.
Closer to home, Flint Hills Resources is planning to invest up to $500 million to expand its oil refinery in Rosemount and launch a project to produce cleaner diesel.
CONSUMER BEHAVIOR SHIFTS
Move beyond the companies on the supply side, however, and you see a marketplace in flux.
At Walser Toyota, orders for the hybrid-powered Toyota Prius, which can get 51 miles per gallon in the city and 60 on the highway, have increased sixfold. "We got two or three Priuses per month last year," said Pat Stanley, product-training manager at the Bloomington dealership. "Now we get 11 or 12."
As mpg — miles per gallon — has returned to the car-buying equation, the nation's top two automakers, General Motors and Ford, have been caught flat-footed with gas-guzzling vehicles.
The burgeoning housing market is still going strong, buoyed by cheap financing. But costs are creeping up, and buyers are asking new questions.
Homebuilder Curt Swanson says prospective buyers of a house he's selling in Plymouth have fretted about having to commute. "Potentially, it's making some people think about not moving out so far," said Swanson, owner of Medina-based Swanson Homes.
Realtor Gregg Roeglin was surprised when a builder alerted him to additional costs recently on a new high-end home, including a spike in the price of carpeting that will add $2,000 alone. Roeglin is representing the buyer, whose current home he'll also work to sell. "I think it's interesting that the builder warned us upfront," Roeglin said.
Paul Vosen, who runs a remodeling company in Madison, Wis., is passing on higher fuel costs to customers, who don't seem fazed. "My monthly fuel bill has doubled," said Vosen, president of Degenhardt Home Improvement.
FOOD PRICES JUMP
Food bills also are likely to rise quickly if oil continues moving upward. Food bills jumped in March when crude oil prices topped $50 a barrel.
Farmers likely will feel the pain come harvest time, said Mike Derickson, manager of refinery operations for CHS Inc. in Inver Grove Heights.
CHS is the farm supply and petroleum cooperative that supplies the Cenex chain of gasoline stations. Though larger farms have lowered energy costs to 2.5 to 3 percent of production expenses in recent years, the near doubling of diesel fuel prices would push those costs back up to 5 percent or more of production expenses, said University of Minnesota applied economist Kent Olson. That doesn't include nitrogen fertilizer and farm chemical expenses that are made from petroleum and natural gas.
Further up the food chain, fuel surcharges paid to truckers are passed along directly to consumers by national wholesalers such as Supervalu Inc. and Nash Finch Co. Truckers have fuel cost surcharges that operate similarly to the airlines: When fuel prices go up, high transportation rates kick in.
But not everyone gets to pass along fuel costs. Dairy cooperatives such as Land O'Lakes in Arden Hills and Associated Milk Producers Inc. in New Ulm operate their own trucks to collect milk from farms, and they use large amounts of energy at storage and dairy processing plants to boot.
NWA'S FUTURE IN BALANCE
Northwest Airlines might feel the most pain of all. Its fuel bill jumped 40 percent in the first quarter, to $630 million, and looks like it will keep soaring. Northwest paid an average of $1.38 a gallon in the first quarter, but spot prices for jet fuel this month have topped $1.70 a gallon. Every $1 increase in the price of a barrel of oil increases Northwest's expenses by $50 million. Thus if oil were to hit $70 a barrel, Northwest's costs would rise $500 million.
The airline has a task force that is trying to find ways to conserve fuel, but chief executive Doug Steenland told employees earlier this year that answers have been elusive. "They're only going to be able to make a small dent in this massive cost increase."
For Northwest, the stakes are high. Along with pension funding and debt obligations, high labor costs relative to its rivals and billions of dollars in operating losses since 2001, fuel could help drive Northwest to file for bankruptcy protection.
At the opposite end of the spectrum is Puckmaster Inc., a Blaine-based recycling equipment maker. Interest in equipment that allows machine shops to recover waste oil has grown as gasoline prices have risen, said regional marketing director Tim Sernett. "When oil was a lot less expensive, they didn't worry about reclaiming it." Today, they're thinking of reclaiming their oil for the first time.
Still, Sernett is worried about slowing auto sales. Many of Puckmaster's customers make auto parts, and slack demand may mean less business, Sernett said.
RETAILERS SQUEEZED
It might seem odd, but Wilsons Leather, the Brooklyn Park-based retailer of leather apparel, could be hurt by oil prices. Animal hide accounts for 75 percent of the cost of a leather jacket, but the other 25 percent comes from construction, which includes the use of oil-based chemicals in tanning.
If crude oil rises, "it will drive the cost of leather up," said chief executive Michael Searles. "But we are not planning to pass that on to the customer. We think we can maintain our price points. We are looking to push the costs back to the manufacturers and be more efficient in transporting products."
Thus Wilsons is negotiating better shipping rates and asking vendors to hold down production cost increases. Even if Wilsons holds the line on its costs, rising oil prices probably will hurt discretionary consumer spending.
"Every retailer is impacted when it costs consumers more and more to fill up at the pump," Searles said.
Many analysts think that the biggest impact is on the discretionary spending of lower-income consumers, the core market for Wal-Mart Stores Inc. and dollar-store merchants.
"We continue to believe any upward pricing pressure on gas, food and other commodities will have a greater negative impact on Wal-Mart's core customer than Target's," Jeffrey Klinefelter, a Piper Jaffray analyst in Minneapolis, said recently.
Klinefelter's firm estimates the average household income of Target's core customers is $55,000 to $60,000 a year compared with $40,000 to $45,000 a year for Wal-Mart's biggest block of shoppers. Wal-Mart blamed some of its lackluster growth last year on rising gasoline prices, especially last summer when prices rose 25 to 30 percent compared with the same period in 2003. The higher gas prices cut into consumer spending at its stores, the company said.
St. Paul-based Gander Mountain, retailer of outdoor sporting goods, thinks that rising gasoline prices could curtail but not eliminate trips or other outdoor sporting activities by its core customers, hunters and fishermen, said Shannon Burns, director of investor relations.
Still, one of Gander's latest promotions is tied into the oil price speculation: In the Twin Cities, the retailer is offering shoppers a free $25 Holiday Station gas card when they spend $200 or more at Gander stores using any MasterCard, she said. The promotion runs through July 4th, she said.
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I am sorry my friend I dont agree, Money sent to the Saudi's ,Venezuela , Canada and other foreign countries and split among oil companies is not money going into the economy.
I dont have any idea why you would assume I live in New England and as for Natural gas, it is higher than fuel oil.
sure, let the "free market" allow the hedge funds and wall street speculators walk away with a percentage of every dollar spent by US consumers at the pump, while at the same time sending the US economy into recession, and causing the political backlash that may put Hillary into the white house.
real great idea, just let the "free market" take care of it and everything will be fine.
People have been looking at new fuels and new types of energy conversion for a long time and will continue to do so. When the price of the fuels we use now rises to the right level, some of those things will become cost effective and will emerge as a result.
Economics never changes. It's like trying to change math, it can't happen.
of course, the money still goes "into the economy" - but now its concentrated into companies providing energy, as opposed to being "spead around" in the form of spending that other corporations need for their survival. so when people have to pay $60 to fill up their cars, Exxon will be a trillion dollar US company, but when those same people can no longer afford to eat at the Outback for dinner, they will fold and fire all their US workers.
Nothing could be further from the truth. I am always amazed at "conservatives" who have no understanding of, and no faith in, free enterprise and freedom in general.
Yeah... I'm just bubbling with enthusiam.
But your love affair with liberal ideas is apparent. Why would it bother you to have Hillary in the White House? Her beliefs are the same as yours.
if someone invested to create a new energy source that had an oil equivalent price of $40/bbl - oil would cost $38/bbl overnight. its a manipulated market. that's why there is no broad scale investment in new energy sources, you can't work a business plan for a new venture when the market price of your competition is a rigged variable.
none of your wonderful "free market" ideals applies to energy, because we aren't dealing with a free market here. Its manipulated. So the normal factors of supply/demand/price and competitive forces that would enter the market in response to those factors, is going to work here.
As to sending out of the country, talk to your elected officials, we have all the oil we need right here, it just needs to be pumped out of the ground.
Then ponder what happens when some country gives us their oil wealth for our fiat paper money.
If you think anyone is big enough to change the long term price of a commodity such as oil, you have a fundamental misunderstanding of economics. Not to mention a liberal viewpoint.
to make hydrogen a reality, the government would have to set a floor on the price of oil. because you can't expect private industry to invest in this, only to wake up 5 years from now and find oil at $20/bbl, destroying their business plan.
you want private industry to do it - good, so do I. then you should support the concept on the government setting a floor on their competitors price to help them get started. because without that, they will be run out of business.
there is plenty of analysis in the financial news about the effects of hedge funds and speculation in the oil markets. its rampant, and its a fact, its not "tin foil".
I'm not agreeing or disagreeing with the opinions, just enjoying all the "pundits" predictions.
And,,, there is nothing wrong with speculation, in fact, it's desireable. It provides liquidity.
Government control of prices is folly. Everywhere and always.
Not to mention, anti freedom.
Communists like it though. And fascists. And Hillary.
so provide some mechanism that these private sector companies that you want to embark on the massive investment needed to make hydrogen a reality, can compete against the oil based energy industry? they can't - there aren't any real shortages of oil that are affecting the price, the price is being set by other factors, and is too variable to make it economically feasible for alternative energy developers to enter the market.
Oil at $60.40 on overnight futures trading.
Start with incorrect assumptions and inadequate understanding of fundamental economics and you are bound to come to erroneous conclusions.
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