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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Being left alone is a good thing.
The bible (as interpreted by many if not most) instructs us to spread the gospel, not shove it down their throats.
You give them the good news, that's your job, the holy spirit converts them, that's his job.
Your milage may vary.
Otherwise known as Ceteris Paribus and a classic economic analysis tool. While I disagree with bobdsmith's ultimate conclusion I do not think his analysis is a mistake.
Where have you been?
The Department of Energy has received funding of about 1/2 TRILLION $ since 1978. And we are we? More dependent on foreign oil than in 1978.
My comment about "fast track" is a sarcastic way of saying that Washington never does what is best for the nation. The throw billions down balck holes like the DOE (and the DOE!) and we get nothing in return.
It will be the same way with hydrogen power. After billions there, it will still be on the drawing boards decades later.
Ok, sarcasm aside, we agree that the government should stay out of it?
Then we disagree as well.
Bush needs to get a pair like Regan had and clean house. I am so sick of PC crap. I'll tell you what I will probably vote 3rd party in 2008 since Republicans cannot get anything done with both houses in congress plus the White House.
Of course St. Ronnie did a real good job with immigration(amnesty)!
perhaps you could offer some specific rebuttals to the argument. no new business is going to invest in a sector where they cannot determine the price point for their new product, based on what established technology in that sector charge. its not going to happen, it isn't happening now in the energy sector (for oil alternatives) - the only energy initiatives are small scale, or are already government funded trial projects.
anyone who thinks that there is going to be huge private investment to develop oil alternatives, based on the current price of oil, is dreaming. its not going to happen, the price is too volatile and the market is being whipsawed by speculative excesses.
its also a well documented fact that the last time there was a "bubble" in oil, that caused the kinds of investments in new drilling that you mention - that when the prices returned to a normal level, those investments that startup companies made to bring on new supplies were blown out of the water. they won't make the same mistake again.
they are all convinced that private industry alone is going to magically produce a hydrogen industry with only private investment. its a total fantasy.
exactly the point I have been trying to make. and it doesn't even have to go as low as $10/bbl, event $25/bbl would knock out most new ideas and investment in the energy sector.
Yeah well he was not perfect. I agree with you on that. Nevertheless, I would love to have Regan in office right now with this War.
that is indeed true, you wonder however how much storage for commodities is practical as China moves to differentiate their currency reserves away from the dollar. but to be sure, in addition to buying up US companies, they will be using their dollar reserves to buy commodities.
I'll tell you how I see the situation but as far as rebutting your argument I believe you are basing your thoughts on the flawed assumption speculation is the root cause. Speculation is not the root cause but the result of world oil demand for the first time in 30 years beginning to outstrip world oil supply. Ceteris Paribus... all things being the same this results in higher prices. This will continue until a new supply/demand equillibrium price is reached.
Speculation may be involved in the price appreciation but speculators are in this market because of the fundamentals. Speculation is good.... it provides liquidity to the market. Speculation is human nature. It was a speculation that gas prices would stay low when millions of Americans boughts SUVs the past 10 years. It was speculation when millions of American moved out to the suburbs the past 50 years.
Intervention in the pricing mechanism of oil by the government is the last thing we need. Price is a reflection of all our human decisions. It is the mechanism that provides the benchmark price you so urgently refer to in your arguments. If any company needs to know the cost of entry into the market for their alternative energy product, they need not look further than the market place and the price consumers are paying for units of energy. The market place is where alternatives have begun on a small scale. The turkey waste oil recylcing plant is an example. If an alternative solution proves profitable at the small scale then it will be used at a larger scale.
lol--You really need to try and get a grip there. Even if oil prices were to climb to $70 a barrel, prices always reverse due to various market factors, the biggest being fund profit taking.
May I suggest you might even want to profit your self from fluctuating energy trending -in relation to going off the deep end - LOL
A more notorious bunch of wildcat speculators cannot be found.
if demand were outstripping supply - there would be shortages. where are they? you can buy as much oil as you want, and as much refined product as you want. the same US "tight supply" refineries that were the mantra last year (continuing this year), are cranking out 2-3% more product this year then last.
speculative forces are driving this market right now to these levels. wall street, the hedge funds, the oil majors, OPEC - everybody is getting fat, and without some kind of intervention, they will just continue to play it up to ever higher levels.
the prior posts from others I have replied to tells the story regarding new investment - nobody is going to get burned like last time, unless they know that $50+ oil is here to stay, you won't see major new investments from the private sector, so long as they know that the rug can be pulled out from under them.
sure, with other peoples money. but those "other people" aren't going to be willing to pony up to invest in new sources at $40/bbl cost (as an example), so long as they fear they can be taken out by a decline in the market price. and since the market price is being whipsawed all over the place, they are unable to gauge a stable, predictable price point and are therefore fearful to invest.
In some urban areas, price gouging gas station owners have charged right about that $3.00 a gallon for high-test. They don't have many customers, but never-the-less they have attempted to over charge.
In terms of the economy even though most governmental economist tend to skirt the issue, if energy costs keep climbing inflation will accelerate and naturally passed on to the consumer of airline tickets and everything else.
You made very good points.
Light crude is up again for August delivery @$60.55 as of this posting.
Oil boils over as Iran stirs pot
Keep an eye on Iran!
July unleaded up again @$1.67.90
(another energy view) Oil bubble will burst soon: Aiyar
For all you Heating Oil fans July's contract has reached $1.67.60
The U.S. Dollar was down some @88.25, while the Euro was up @$1.21970 .
Keep the gas tank filled, for tomorrow the price may rise again.
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