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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You are trying to do trig without knowing your multiplication tables.
I'm not trying to be insulting. But this exchange is impossible when you don't have fundamentals.
Government intervention in markets is a non starter. And a mainstay of communist, socialist, fascist and modern America liberalist thinking.
So until you get up to speed, pick your team, and support them. Hillary will love to have you aboard.
What do you suggest be done on that matter? What is a "fast track" for that technology?
By that logic there would never be another gas well, oil well, or lanolin well drilled. Nobody would dare to build a new model car, either.
i think he means spending more tax monies
That would be sad if so.
Look for continued success for Boeing with it's fuel efficient 787 Dreamliner.
Orders are already hot and with oil prices rising I expect Boeing will realize they made the right bet on the future with this aircraft.
Liberals never think there is a free market. They screw up a market, then say that it isn't working.
Which is it, prot.
When will bush balance the federal budget and our balance of payments? When will china stop consuming so much oil?
Oil will come down in price when we have a trade surplus, when the US dollar is strong again, and when we boycot china so that they dont compete for world oil. Simple enough to do.
the only way we can move towards a trade surplus would be a substantial reduction in our standard of living. A huge increase in savings, GDP would need to contract by neary 5-6%
it is no coincidence that the USA, UK, Australia all have large trade deficits and high GDP growth, while Germany and Japan have surpluses and no GDP growth.
The USA hasnt had a merchandise trade surplus since 1971 or so and a current account surplus since 1991, when unemployment was nearly 8%
If I've read correctly, '73 was the year real U.S. wage growth stopped - permanently.
""If I've read correctly, '73 was the year real U.S. wage growth stopped - permanently.""
Untrue.
Real wages fell each and every year from 1973-82, grew from 1982 to 1990. Fell in 1991-93 and grew throughout hte 1990s.
Wages for high school only workers adjusted for inflation did peak in 1973
No ANWR is not the answer.
This will kill the economy though. Most of peoples budgets are going to be a real balancing act.
Damn those textbooks and their lies.
Speaking of trucks. Why is it that a number of trucks have far more comfortable seats then over 90% of the cars made today ?
The majority of americans, esp males, do not have a college degree - therefore, real wages for most americans have not went up since 1973 - which means that we have not had economic growth for 30 years.
you also have to figure in taxes to find out real take home pay - since social security, state and federal income taxes, property taxes, sales taxes, have went up substantially in the past 30 years - faster than wages.
GDP would "increase", not "decrease", if we replaced all those goods made in china goods with made in USA - all the new factories and offices, and tech workers etc that would be needed would substantially increase our growth and our independence.
The bigger the bubble, the bigger the pop.
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