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High Energy Prices Likely to Linger in '06 / The Cost of Oil and Gasoline Will Remain High, but Could Fall in Second Half of Year

Posted on: Friday, 3 March 2006, 12:00 CST

By BRAD FOSS

Terry Grandchamp's Virginia home-remodeling business is booked through spring and he's planning to bump up his prices to help cover the cost of gasoline and building materials.

But when it comes to his own finances, there is no passing the buck, so Grandchamp is doing his best to conserve fuel at home and on the road.

At North Carolina-based Family Dollar Stores Inc., the biggest worry these days is that the already tight budgets of low-income shoppers will be nearly busted by a surge in home-heating costs this winter. The company aims to stabilize itself by selling fewer discretionary goods and more essentials such as food and health products.

Such is life for consumers and companies grappling with the prospect that today's high energy prices may stick around for a while. Crude-oil prices, while sharply below the 2005 peak of almost $71 a barrel in August, are expected to average more than $55 a barrel through the end of next year and potentially longer than that. That is more than 2 1/2 times the $19.70 a barrel that crude- oil futures averaged during the 1990s, and about 60 percent more than the average price since 2000.

It's probably not enough to cripple the economy in 2006, but stubbornly high prices for oil and natural gas could stunt growth and increase inflationary pressures for the second year in a row. With supplies still relatively tight, there is always the risk of a more severe energy-related economic shock if there were a major disruption such as the most recent hurricane season.

Economists say the more likely scenario is that Americans will begin to breathe a little easier by the second half of the year.

That's because they will have already absorbed much of the pain of a multiyear run-up in prices and will benefit from stable, if not falling, energy costs.

From airlines to manufacturers to retailers, "we're seeing a lot of emphasis on conservation in business," said Stephen P. Brown, an economist at the Federal Reserve Bank in Dallas.

Companies that weren't already making changes before Hurricanes Katrina and Rita are doing so now because they saw how tight supplies are and how easily a disruption could push up prices, he said.

At the consumer level, Brown sees the discounting of SUVs and the premiums auto dealers are charging for gas-electric hybrids as the early signs of a slow but significant change.

"These things take time," he said. "Quite often, people mistake the amount of time it takes to adjust to prices as evidence of society not responding."

Grandchamp, who lives in Annandale, said he hopes at some point to own a hybrid vehicle, but for now he and his wife simply try to drive their gas-guzzling van and SUV less - a change in behavior that he says is permanent.

"I don't believe in just wasting money," said the 55-year-old Grandchamp, who coordinates errand-related driving with his wife and has asked his kids to take the bus home from school.

Lower fuel prices would be welcome news for Family Dollar Stores of Matthew, N.C., which saw its profits erode in 2005. Its main customers are people who earn less than $25,000 a year and are therefore most vulnerable to rising energy prices.

With its clientele spending less on clothing and other discretionary goods, Family Dollar intends to boost sales by stocking its stores with more essential goods, such as milk, bread, cleaners and health products.

But even that strategy may have its limits. Experts say when utility bills soar this winter, many poor families may decide to cut spending on clothing, health care and food in order to keep their homes warm.

Oil prices are forecast to average $58 a barrel in 2006. While that is up slightly from $57 a barrel in 2005, the good news, according to several economists, is that prices are expected to fall in the back half of 2006.

Analysts believe that the cost of oil, natural gas, gasoline, diesel and other fuels will remain high by historical standards - as will the risk of shortages.

Oil prices peaked in the U.S. in 2005 at $70.85 in late August, average retail gasoline prices crested at $3.07 a gallon in early September and diesel prices hit a high of $3.17 in late October.

"Unfortunately, 2006 is a year where those records are still possibly threatened," said analyst Tom Kloza of Wall, N.J.-based Oil Price Information Service.

ILLUSTRATION: CHART

Source: Richmond Times - Dispatch

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