Fueling Fears
Can the economy withstand $3-a-gallon gasoline?
Zandi says the real effects of sky-high energy costs may not fully be felt until later this year. "The concern would be come wintertime," he says. "If prices are still this high and consumers face record home-heating bills while interest rates are rising--and can't get another home equity line of credit because it becomes cost prohibitive--then I'd start to worry."
Making do. Of course, many households are already worried about gas prices. Though still shy of the peak reached during the oil supply cutoff during the Iraq-Iran War in 1981--$2.95 per gallon when adjusted for inflation--last week's $2.55-a-gallon average was a nominal record. "It's killing me," says John de Freitas, a taxicab driver who lives in Alexandria, Va. "Gas is a business expense, but a lot of this business expense is a liability because you are spending money you don't have." De Freitas, 62, fills his car once a day, for around $35 at the pump. That's up $5 to $10 from a year ago. To compensate, he runs the cab's air conditioner only when he has passengers and keeps the windows rolled down when he's alone. It's a major inconvenience, especially during the humid mid-Atlantic summer. But with gas costing 43 percent more than it did in January, it's a price he has to pay.
It's hard to predict where gas prices are headed from here, especially since unexpected events like hurricanes can disrupt the nation's already-tight refinery capacity.
The catalyst for the most recent run-up was a string of breakdowns at a dozen U.S. oil refineries, representing 16 percent of the nation's capacity for converting crude oil into usable fuel for cars, trucks, and jets. Thunderstorms knocked out the power at the big ConocoPhillips facility in Wood River, Ill. Another power failure shut down a Premcor plant in Memphis. Most troubling, BP's huge 460,000-barrel-a-day Texas City, Texas, refinery, where 15 workers were killed in a March explosion, has been plagued with problems and operating well below capacity. In the past, a few refinery problems during the busy summer months would not have greatly stressed the gasoline market. But rising global demand for oil has sopped up all spare capacity.
The effects of the high fuel prices are starting to trickle down into parts of the consumer economy. Calcote's firm, Tascosa Brick, isn't the only company feeling the pain. Wal-Mart, the world's biggest retailer, last week announced disappointing second-quarter results, blaming rising fuel costs. The discounting giant said gas prices are not only affecting consumer demand, but they added $30 million in transportation costs last quarter and $100 million in utility bills. "All anyone needs to know is that after stripping out autos and gas, retail sales have been flat as a pancake in two of the past three and in three of the past five months," says Merrill Lynch economist David Rosenberg.
To make matters worse, consumers are starting to feel the secondary impact of rising energy costs in the form of increasing prices. Two years ago, for example, customers of Grand Events & Party Rentals in Memphis could get their tables, tents, and party items delivered for a mere $30. When gas prices started to rise last year, the company passed along the extra costs to customers. Door-to-door service is now $60. But Mark White, who runs the small business, says that's still just enough to keep the company's 16-truck fleet fueled up and out on the road daily.
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