Economy feels shock of oil prices

Twelve months of rising energy prices are starting to threaten the US economy.

A spike in oil prices has almost doubled the price of a commodity that literally fuels much of the economy. Combined with an even sharper increase in the cost of natural gas, the hike is siphoning cash from consumers and businesses at a time when the US economy is frozen in place.

The extra energy bill - impacting everyone from commuters to airlines and factories - could amount to as much as $100 billion on an annualized basis. Economists say it's enough to shave 1 full percentage point off economic growth.

And, if prices stay at this level or rise further, the risk of another recession is very real. In fact, rising fuel costs helped to cause or deepen the past four recessions: the mid-1970s, early 1980s, 1990-91, and 2000.

"If the prices are sustained for more than a few months, it makes a recession more likely," says Mark Zandi, an economist with Economy.com., an economic website.

The higher prices are showing up almost everywhere - from the rising cost of heating an apartment in Boston to the amount of money it takes to ship a head of lettuce from Mexico to Chicago. Airlines and semi-operators are tacking on fuel surcharges. And, last week, some heavy-industrial businesses said they would pare back their output until prices evened out while others warned Congress that the nation could expect higher prices for products ranging from fertilizer to bathroom fixtures.

The situation reminds Mr. Zandi of 1990, just before the Gulf War. Back then the price of oil rose from $20 a barrel to about $40 a barrel, just a few dollars more than current levels. Higher energy prices, combined with anxiety over the upcoming battles helped to drive the economy into a recession. "It's not too dissimilar to today," he says.

Economists learned from the 1990s experience that sharply rising energy prices have real consequences. "Money spent at the gas pump is money you can't spend at the mall," says David Wyss, chief economist for Standard & Poor's. "It hurts consumer confidence."

Consumer confidence is definitely wavering. Last week, the Conference Board, a business research organization, reported that its confidence index declined sharply in February. "Lackluster job and financial markets, rising fuel costs, and the increasing threat of war and terrorism appear to have taken their toll on consumers," says Lynn Franco, director of the board's Consumer Research Center.

That's certainly happening to Rich and Susan Minio, who rent an apartment in Needham, Mass. Even though they keep the thermostat at 65 degrees, she says their utility bills have doubled. Their last bill was for $311. "It's eating up our budget," says Ms. Minio, who works for a book publisher. "Now, we don't go out to eat as much, in fact, we barely do anything at this point."

It's not likely to get any better over the next few months for the Minios and others in New England. Gas utilities, such as KeySpan Energy Delivery, Bay State Gas, and Nstar have all filed for higher prices ranging from 13 percent to 36 percent in March and April. Last week, in one indication of the volatility of the situation, the price for March natural gas futures on the New York Mercantile Exchange jumped 65 percent in one day.

Still, Richard Curtin, director of the University of Michigan's Survey of Consumers, says consumers don't expect energy prices to stay high. On Friday, he released his latest survey which showed confidence dropping, but not as sharply. "Consumers are assuming the war will be short and decisive and energy prices will fall," he says. "If it did not happen that way it would be a shocking development for them."

Certainly business is hoping that's what happens as well. Take the trucking industry. A year ago, truckers paid $1.15 a gallon. Today, diesel is at $1.71 a gallon, the highest since 1990. Many truckers are adding fuel surcharges that amount to about 80 percent of their additional cost. But the economics of this don't bode well.

"Say your tanks are bone dry, it costs $160 more to fill up than it did last year at this time," says Bob Costello, chief economist for the American Trucking Association in Alexandria, Va. "If fuel prices were to stay here for a long time, we would see a lot of bankruptcies," he says.

Some airlines are already close to bankruptcy. That's the case with American Airlines, which says it will follow United into Chapter 11 if it does not get concessions from its unions. Adding to its problems are higher costs for jet fuel which has climbed from 70 cents a gallon in mid-November to about $1.20 a gallon today. The company estimates that every cent per gallon increase in fuel prices adds $30 million to its expenses.

American hopes the oil markets have already discounted a war with Iraq. "Thus, future price spikes might be blunted from what they were the last time, if the shooting starts. At least we can hope," says Tara Baten, a spokeswoman for American in Ft. Worth, Texas.

But the Energy Information Agency in Washington expects oil prices to take their time easing. Because of the cold winter, inventories are low. OPEC nations say they are producing about as much as they can. "Our expectation is that the move below $30 a barrel will be later rather than sooner," says Dave Costello of the agency, a part of the US Energy Department. "That all assumes no further disruption because if there is, there will be more pressure on prices."

In other words, more sticker shock.