US consumers seen cushioned from energy price shock

reuters.com Mon March 3, 2003 04:03 PM ET By Mark Wilkinson

WASHINGTON, March 3 (Reuters) - The rise in heating oil and gasoline prices on war fears and frigid weather may have made many American consumers frown, but economists say the climb is not yet sharp enough to crimp spending significantly.

Nor is the impact on the broader economy from the recent rise likely to be too harsh, barring a prolonged and messy war with Iraq.

The White House last week said President George W. Bush was "greatly" concerned about the price jump, and some on Capitol Hill fretted that higher prices will be a significant drag on economic growth.

"Our economy is driven by what we spend," Republican Rep. John Peterson said. "When we pay triple for home heating, we don't have as much consumer goods to buy."

But James Glassman, senior economist at JP Morgan, said higher prices will do little more than shift growth from the first to the second half of the year.

"It will be a bit of a drag on the economy in the first half of the year, but it will only push that lost growth into the second," he said.

While the oil price spikes in the 1970s took a sharp toll on the U.S. economy, analysts believe rising costs should only have very limited effects on consumers this year because the economy is less reliant on oil and rising costs are less likely to creep into broad inflation.

"Over the past fifteen years, oil prices have had very little impact on the overall economy because they don't have a dramatic influence on the cost structure of businesses," Tim O'Neill, chief economist at Bank of Montreal/Harris Bank said.

However, he added: "A rise in prices will directly affect the (consumer's) pocket book." O'Neill said the rise should not so far be enough to badly hurt spending.

While utility prices have pushed the Consumer Price Index -- the broadest gauge of U.S. inflation -- slightly higher, the core CPI, which excludes volatile energy and food prices, has remained very tame, soothing recent inflation fears.

A BAD JANUARY

Energy prices jumped in January and crude oil futures approaching $40 a barrel last week, the highest level since the Gulf War. The spike was spurred by fears of a looming war with Iraq and worker strikes in Venezuela, the world's fifth-largest oil producer.

Gasoline prices last month jumped to $1.46 per gallon, almost one-third higher than in January 2002, and are expected to rise another 20 percent by the spring, according to the Department of Energy's Energy Information Administration.

Low natural gas inventories pushed up prices, and the cold spell that took the Northeast by surprise this month pushed heating oil costs up.

Dave Costello, an economist at EIA, estimated that while American households spent $600 to $650 on average on natural gas during the winter of 2001-2002, this year's cost will be about $150 higher.

The hardest hit, however, will be those consumers who last year paid on average $640 for heating oil and will have to dish out close to $1,000 this winter.

"It won't be the worst season," Costello however said. "(Consumers) will make adjustments."

Since today's consumers drive more energy-efficient cars, live in energy efficient homes and can choose to travel less or take public transportation to cut down on energy spending, the effects of higher energy costs will be limited, O'Neill said.

Economists believe that a each $10 increase in the price of crude oil could shave off as much as 0.5 percent off gross domestic product.

Bank of Montreal's O'Neill believes, however, that high energy prices would only seriously hurt the economy were they to be sustained over a year or more.

"It's not so much about how high prices go, but how long they stay there," he said.