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Oil, Gas Prices Threaten Economic Growth

Posted on: Wednesday, 31 August 2005, 00:00 CDT

Aug. 31--Oil and gasoline prices set records Tuesday in the wake of Hurricane Katrina, raising the possibility that the storm could be part of an "energy shock" that sparks a recession.

Crude oil jumped $2.61 a barrel, closing at a new high of $69.81 on the New York Mercantile Exchange as the damage to Gulf Coast production facilities became more clear. In California, where Bay Area refinery problems also have cut supply, the statewide average price for a gallon of self-serve regular hit a record $2.81 and analysts predicted the average could hit $3 in the coming weeks. A Democratic state senator proposed regulating gasoline prices.

Meanwhile, a Field Poll to be released today showed 71 percent of Californians see rising gas prices as a serious matter -- and 40 percent are cutting back on other spending to compensate.

Consumer spending accounts for about 70 percent of the nation's total economic output, so more money spent on gas and less on other items could have a big impact. For instance, Wal-Mart Stores Inc. has blamed high fuel costs for disappointing sales.

While it's too early to predict a recession, "the probability has gone up quite a bit in the last couple of weeks," said James Hamilton, a UC San Diego economist who studies energy shocks.

He said the hurricane by itself wouldn't be enough to cause an energy shock. But the damage to production facilities, after weeks of rising petroleum costs, makes the potential harm to the economy more worrisome.

The near doubling in oil prices over the past two years amounts to a nearly $80 million-a-day tax on Californians, said University of California energy economist Severin Borenstein.

"This is a very real hit," he said. "That starts to squeeze a lot of people's budgets."

In many respects the economy is less vulnerable to energy shocks than it was 30 years ago, when the Arab oil embargo caused the recession of the mid-1970s.

While oil consumption has grown over the years, the economy has grown so much faster that the nation uses less energy per dollar of economic output. The era of globalization acts as a check on inflation even as energy prices rise.

Adjusted for inflation, oil prices would have to hit about $90 a barrel to match the 1981 peak.

Another huge difference: In the 1970s the federal government put a lid on oil prices, which created long gas station lines and contributed significantly to the recession. Nowadays the price floats to the market price, and motorists don't spend hours waiting to fill up.

But that doesn't mean the economy is out of the woods. Every oil shock of the past 30 years has been followed by a recession. That includes the early 1990s, when there were no price controls and Iraq's invasion of Kuwait led to a price spike.

Borenstein said the current run-up in price amounts to the biggest oil shock since price controls were lifted in the early '80s.

"We're sort of in unknown territory," he said.

Many Gulf Coast facilities remained closed Tuesday as companies scrambled to assess the damage to refineries, oil platforms and pipelines. The uncertainty led to higher prices in oil, gasoline and natural gas. The Bush administration was still considering whether to release oil from the Strategic Petroleum Reserve.

Although the national average gas price held steady at $2.60 a gallon, prices were on the march in California, where refinery glitches have pumped up prices since last week. Sacramento prices increased 2 cents since Monday to $2.77, a record for the area.

The new Field Poll said 40 percent of Californians report they're spending less on other things, including food and clothing, to compensate for high fuel prices. Of those with household income of less than $40,000 a year, 54 percent are cutting back on expenditures, the poll said.

Barbara Moore, a disabled Sacramentan who lives on a fixed income, said high fuel costs are forcing her to cut back on "just about everything."

"It's really hitting me in the pocketbook," she said Tuesday as she purchased $5 worth of gas for her minivan at the Fastrip convenience store at Power Inn and Florin roads in south Sacramento. "It's terrible what's going on -- I can't stand it."

Leo Finneran, a retiree from near Placerville who was having a Taco Bell lunch in Rancho Cordova, said he's scaled back driving his '91 Honda Accord.

"I used to visit my favorite coffee shop in Cameron Park every day and read the paper," he said. "Then it dawned on me that a $1.50 cup of coffee was costing me $4. I stay home now."

Californians are making other changes, according to the Field Poll. Twenty-eight percent have recently purchased a more fuel-efficient vehicle, 20 percent are carpooling and 13 percent are using public transit more often.

Some 59 percent are simply driving less and even shortening road trips while on vacation.

Asked who they blame for much of the mess, 58 percent of the Field Poll respondents said the oil companies, 47 percent said the Bush administration and 41 percent said other oil-producing countries. And 31 percent blamed Americans who drive gas guzzlers (Poll respondents could blame more than one entity).

Taking on the big oil companies, state Sen. Joe Dunn on Tuesday reintroduced a constitutional amendment that would give the Public Utilities Commission authority to regulate gasoline. The idea went nowhere when Dunn introduced it in 2003.

"In their opposition to our amendment, big oil lied to get our bill killed," said Dunn, D-Santa Ana. "They lied then, and they'll lie again."

His amendment would allow price caps on gas as a last resort.

"Price caps are not a solution to a dysfunctional market," he said in a prepared statement. "However, they are a damage control measure until solutions are developed."

Dunn offered his plan two days before Hawaii -- the only state with more expensive gas than California -- puts into effect a law that regulates the wholesale price of gas.

The Hawaii law ties the ceiling to an index of wholesale prices on the mainland. Economists have said the caps could create shortages and gas lines, as in the 1970s.

Jeffrey Williams, a UC Davis economist who studies commodities markets, said the most remarkable thing about the run-up in oil is that contract prices for delivery in future years are also in the mid- to upper $60 range.

That means the market believes this isn't a temporary spike, he said. Rather, prices are expected to stay high for years to come.

That could mean the economy will stay strong enough to keep oil consumption high, he said. Or it could mean years of stagnation, in which high oil costs put a damper on economic activity.

"You don't know," he said.

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WMT,

Source: The Sacramento Bee

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