Behind the fuelishness
www.northjersey.com Friday, February 14, 2003 By KEVIN G. DeMARRAIS Staff Writer
The price signs tell the story at Wayne Exxon on Alps Road: The average price of unleaded regular in North Jersey, according to The Record's Marketbasket Survey, has increased 13 cents since mid-January, to $1.55. Heating oil prices have increased even more, from $1.45 to $1.78. (CHRIS PEDOTA/THE RECORD)
Blame it on the prospects for an attack on Iraq. Blame the lingering strike in Venezuela. Blame nervous commodities traders. You can even blame Mother Nature.
To people like Gilberto Drada, it really doesn't matter who is responsible.
What matters is that fuel prices have soared, and it costs the Little Ferry man about $50 a week to keep his small delivery truck on the road. He drives for a Paterson soda company, and a year ago the tab was $30 to $35.
"What am I going to do?" Drada said after paying $32.97, at $1.69 per gallon of diesel fuel, to fill up at a Hess station in Paramus this week. "I have to drive. It's my work."
If the increase affected drivers only, that would be bad enough. But higher energy prices could have a significant impact on an already sputtering American economy, said economist Howard Tuckman, dean of the Rutgers University Business School in Newark.
Increases in fuel prices are "the equivalent of a tax, taking money out of a consumer's pocket and putting it into a place where it is not likely to stir the economy," Tuckman said.
A number of factors that would individually push prices higher have, combined, created the recent surge.
Much is due to market concerns about disruptions of crude oil supplies from the Middle East if the United States goes to war in Iraq. If hostilities are brief and successful, oil prices could drop quickly, as they did after the Persian Gulf war 12 years ago, officials said.
At the same time, petroleum imports from Venezuela have been cut sharply by a 2½-month general strike, helping shrink the U.S. oil supply to its lowest level since 1975. Before the strike, Venezuela was the world's fifth-largest oil exporter, shipping 2.4 million barrels a day, half to the United States.
With the supply chain disrupted, some companies have taken refineries off line for early maintenance, much as a Nascar driver takes advantage of a yellow caution flag to hit the pits early, said Tom Kloza, chief oil analyst for the Oil Price Information Service in Lakewood.
Wallets under assault
At 269.8 million barrels, crude oil stocks are now just below the lower end of an inventory range needed to assure enough oil is available for efficient refinery operation, the Energy Department said Wednesday.
The combination pushed the price of crude over $36 a barrel Thursday, about $10 more than in November, and higher prices for gasoline and oil deliveries flow directly from that, Kloza said. "It's definitely not price gouging."
Even as supplies drop and rates rise, the number of "degree days" - a common measure of the amount of energy needed for heating - is running 40 percent higher than a year ago, creating a one-two assault on consumers' wallets.
Each of these factors has contributed to what some critics say is an overreaction by commodities traders on the New York Mercantile Exchange. "It all starts at the Merc," said Eric DeGesero, executive vice president of the Fuel Merchants Association of New Jersey in Springfield. "It is a buying momentum that feeds on itself."
The same "irrational exuberance" that Federal Reserve Chairman Alan Greenspan spoke of at the height of the stock market bubble "is permeating the energy commodity market," DeGesero said.
The unpredictability was seen Thursday when heating oil futures rose 2.2 percent in response to colder-than-normal weather in the Northeast, but natural gas futures went down for the third time this week because traders see warmer weather ahead.
That's what makes it difficult to predict where prices are going, Kloza said. "Most people think we're at elevated numbers that can't be sustained . . . but we're in the grip of irrational things happening and you don't fight emotions."
The cold-weather factor has probably peaked and refineries should be coming back on line, Kloza said. But uncertainty about Iraq and Venezuela remain, and the result is higher prices at the pumps.
In The Record's Marketbasket Survey of more than 60 North Jersey gas stations, unleaded regular has gone from $1.42 in mid-January to $1.55 this week. That is almost 36 percent higher than last year's average of $1.14, although the 2002 price was low because a post-9/11 glut forced suppliers to slash their prices.
Heating that house
Home heating oil prices have risen even more, soaring from $1.45 in January to $1.78 this week in the Marketbasket Survey. A year ago, those prices averaged $1.14.
Many increases are passed directly to customers, as with gasoline and heating oil, or through fuel surcharges, which were common among airlines and trucking companies three years ago.
But market conditions sometimes prevent businesses from passing along higher prices, however, and that can be a problem, Tuckman said. "Firms in extremely competitive markets may have to swallow the increase."
If the company is on the edge financially, the inability to pass along higher costs to customers could be enough to push it out of business or into bankruptcy, he said.
Many of the nation's airlines are at that point now, so a significant and sustained run-up in fuel prices "could definitely tip them over into bankruptcy by early summer," Tuckman said.
In a similar way, higher heating bills will put state agencies and universities under increased financial pressures, and "will magnify the budget cuts by the governor," he said.
About the only people and companies not paying higher prices are those that hedged by locking in prices last year.
That includes heating oil customers who signed up for a guaranteed price last summer and gas heat customers, who benefit from Public Service Electric and Gas Co.'s advance purchase of 80 percent of its natural gas at a preset price.
But the additional 20 percent has to be purchased on the open market - where gas prices have more than doubled in the past year - so customers face higher charges down the road.
Some airlines also have locked in prices for some of their jet fuel - which is similar to home heating oil and diesel - but that may not be enough.
"We're hedged through the first quarter," said Julie King, a spokeswoman for Houston-based Continental Airlines. "It's always an item that we watch carefully, and can definitely have an impact on our business."
In the past, airlines have imposed fuel surcharges. Under federal rules, the carriers are prohibited from announcing them in advance.