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| Memorial Day weekend: High oil prices are pinching wallets, but boaters were still in evidence at the Cypress Black Bayou
Recreation Area in Louisiana. Mario Villafuerte |
Fuel prices' toll on U.S. economy
A $10 increase in the price of a barrel of oil can lower GDP by about 0.2 percent.
from the May 27, 2008 edition
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Reporter Ron Scherer talks about how higher oil prices are affecting Americans, with the potential for even higher gasoline prices to come.
As the price of energy rises, the first thing people try to do is maintain their standard of living, Gallup has found. "They sacrifice saving," Mr. Jacobe says. "But when it comes to major impacts like $4- or $5-per-gallon gas, people start to change their lifestyle. We are starting to see it where people are parking their big vehicles and driving something more fuel efficient."
Ford Motor Co. has already noticed this shift. Last Thursday, it said it would cut production of some larger vehicles by as much as 40 percent in the second half of 2008.
The business sector, which generally has become a more efficient energy user, is making other changes, too. Kenneth Simonson, chief economist at the Associated General Contractors of America, is seeing more price increases and fuel surcharges.
Construction companies are getting squeezed by more than energy prices. Steel prices have been rising, up 5.5 percent in both March and April over the previous months' levels. Among the reasons: strong foreign demand and the weak dollar, as well as the rise in energy prices, Mr. Simonson says.
But prices are also starting to ratchet up for plastic products, he says, because natural-gas prices have been rising as well. He cites one contractor who wrote him that he had just been told his costs for PVC (polyvinyl chloride) products were going up 20 to 30 percent.
Simonson finds anecdotal evidence that some of these cost increases are getting pushed through to consumers. He points to a Holyoke, Mass., roofing contractor who is raising prices 5 to 8 percent on some plastic products.
One result of the rising prices, combined with slowing demand and higher financing costs, is that an increasing number of projects are getting deferred, he says.
The economy could probably cope with just the energy price increases, says Don Norman, an economist at the Manufacturers Alliance/MAPI in Arlington, Va. But he notes that energy costs are rising against a backdrop of falling home prices and the collapse of the subprime mortgage market – which have affected the ability of all sorts of businesses to get loans. "It's a triple whammy. It's amazing the economy has been as resilient as it has been, given all the hits it has taken," Mr. Norman says.
Consumers have yet to feel the full impact of the rising price of oil. Norman estimates it will take another four to six weeks for that to happen. Given the current price of oil, Zandi estimates that gasoline should be closer to $4.50 a gallon. A sharp rise like this could cause the economy yet more problems.
"When people see high gas prices and then see it rising several cents a gallon each day, that is when they have the psychological problem of not knowing how high it will go," Jacobe says. "When that happens, people start to adjust their lifestyle."
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