Palm Beach: Oiling the economic skids
www.gopbi.com By Ted Jackson, Palm Beach Post Staff Writer Sunday, March 9, 2003
If all of a sudden it feels like you've got less money to spend this year, it could be because you're feeling the effects of soaring energy prices.
Higher energy costs aren't just bad for the pocketbook.
It's a dangerous situation for the sputtering economy, which already has been badly mauled by uncertainty about a possible war with Iraq, economists say. As a group, economy watchers seem to be growing increasingly worried that high energy costs might tip the nation into a recession.
Some are blunter than that.
"If oil prices do not come down relatively soon, there will be another recession," said Thorsten Fischer, an economist at West Chester, Pa.-based Economy.com, an economic research firm.
Oil price increases have played an important role in helping cause virtually every recession over the past 40 years. Except for a brief period in 1987, every time oil has jumped by 60 percent or more the economy has slipped into recession shortly afterwards, according to Economy.com.
Oil prices are up 60 percent from a year ago.
Analysts at that firm say the economy already is fragile, pointing out that gross domestic product growth slowed to just 1.4 percent in the fourth quarter.
"It's clear that the price of oil will be a decisive factor in whether the economy slumps or rebounds," says Daniel Yergin, chairman of Cambridge Energy Research Associates in Cambridge, Mass.
Other energy markets, such as natural gas, have been skyrocketing as well. Many believe that while there is a possibility oil prices will come down in a quick war with Iraq, problems in the natural gas market are longer-term in nature and could be a drag on the economy for some time to come.
Also, if the disruption in the Middle East turns out to be longer than generally anticipated, economists are universal in saying that will be very bad news indeed for growth.
"A protracted war in Iraq would be a disaster for the economy," Economy.com's Fischer said. "Not only would energy prices likely go sky-high, but consumer and business sentiment would be badly damaged."
Think about the recent hikes in energy prices as an onerous tax on consumers. But instead of the proceeds going to government coffers, they are flowing into the pockets of oil company shareholders and the treasuries of oil-exporting nations.
Palm Beach County residents are paying 45 percent more for gasoline, at $1.77 per gallon, and 175 percent more for natural gas, at 82 cents per therm, than they were a year ago.
Florida Power & Light Co. won approval last week from regulators for a 6.2 percent residential fuel adjustment rate hike beginning in April, an increase that could be the first of several as the utility has become increasingly reliant on natural gas as a source of fuel.
Nationally, Fischer estimates, households are spending about 7 percent of their budgets on energy, up sharply from 4.3 percent on average last year.
"When energy prices go up like they have, it affects people's spending decisions," said Ron Earley, senior economist at the federal Energy Information Administration in Washington.
Over the past few months, it seems almost everything that could possibly happen to put upward pressure on energy markets has happened: prospects that war might disrupt vital Middle East oil supplies and actual major disruptions in key oil-producing countries such as Venezuela have combined with soaring U.S. weather-related demand to push some fuels to their highest levels in history.
How long energy prices will stay this high is fast becoming the most important question facing the economy.
"It's key right now," Fischer said.
The prevailing wisdom is that there will be a repeat of what happened during the Persian Gulf War in 1991, when oil prices surged in much the same way they have recently, but quickly fell after the war started and it became clear there would be a swift victory.
Alexander Levien, an oil trader at Boca Raton-based Ken Wolf Commodities, has positioned himself to profit from just such a scenario.
"We believe the war will be short and that oil prices will fall quite a bit once the war begins," he said. Levien's view is mirrored in the prices for oil in the futures market, which he says are anticipating a fall in oil to about $30 per barrel by the end of the year.
Crude oil traded at around $36.50 last week in New York, 20 percent higher than at the start of the year.
The stock market also is discounting a near-term fall in oil, analysts say. Although oil prices have soared and oil companies have been minting money in recent quarters, investors have not bid up oil shares because they believe oil prices will soon tumble, erasing the recent rise in company profits.
But the prevailing wisdom does not take into account that factors other than just the threat of war in the Middle East are behind the rise in oil prices, according to David Costello, economist in charge of short-term oil and gas forecasting at the Energy Information Administration.
He believes the cold weather, low levels of crude oil inventories and political unrest in Venezuela are enough by themselves to have caused much of the steep rise in prices.
"We are forecasting a big jump in oil prices for this year no matter what happens in Iraq," says Costello, adding that he anticipates that oil will end up averaging $32.40 per barrel in 2003, up 25 percent from last year.
Even if oil prices do fall quickly on any war in the Middle East, that doesn't mean energy costs will also fall quickly at home.
Because of technical refining factors having to do with Clean Air Act requirements, the AAA Auto Club says gasoline prices will rise by another 10 cents per gallon in the spring no matter what the price of oil. Global Insight, a Lexington, Mass., economic consulting firm, believes it could be as late as August before gasoline prices start coming down, if they fall at all.
Should the disruption to the oil market caused by a war in Iraq prove to be longer-lasting, oil prices could stay higher for longer as well.
OPEC officials admitted a week ago that members are barely capable of covering Iraq's 2.5 million barrels per day in production in the event of war, so any unforeseen disruption in supply could have an outsize impact on the price of oil later on this year, they warned.
One thing that will have a calming effect is that President Bush is almost certain to release oil from the country's enormous Strategic Petroleum Reserve stockpile if there is a war with Iraq. The extra supply will help push oil prices down at least over the short term, analysts say.
But by purchasing large amounts oil in the open market last year for the reserve, the Bush administration helped push oil prices higher without achieving its goal of increasing overall stockpiles, according to a sharply critical report issued last week by a Senate investigative committee.
Unfortunately for the economy, oil isn't the only energy market that's been skyrocketing lately.
Natural gas futures hit an all-time high of $11.89 per million British thermal units in New York trading a couple of weeks ago and have since settled back to around $7 per million BTUs, up 75 percent since the start of the year.
Although much of the recent natural gas price rise is due to very cold weather across much of the nation, analysts say that natural gas prices are likely to remain historically high over the next several years even under normal weather conditions.
The problem is that natural gas use has soared 30 percent since 1996, while production has barely kept pace. Production actually fell about 5 percent last year and is expected to keep falling through 2005, according to a report by Lehman Brothers.
Florida Power & Light, a division of Juno Beach-based FPL Group, says it buys about 15 percent of its natural gas on the open market, so the utility is largely sheltered from short-term price fluctuations by long-term natural gas contracts. Nevertheless, FPL has become increasingly reliant on natural gas. For example, it converted its Fort Myers facility to natural gas from oil recently.
Last year, the electricity company used natural gas to power 33 percent of its generating capacity on average, up sharply from 24 percent in 2001. The company has the ability to quickly switch about 20 percent of its generating capacity to oil, which is somewhat cheaper than natural gas now. By comparison, New York state can switch only 10 percent of its capacity.
"We are required by law to use the cheapest fuel," FPL spokesman Bill Swank said. "We are burning more oil right now."
There's no doubt that economists are very concerned about high energy prices and their growing impact on the economy.
But they also point out that the nation is far less dependent on energy to power growth than in the 1970s, when big price increases led to a decade of anemic national economic performance.
"We are using less oil per dollar of gross domestic product than at any other time in the last 100 years," said the Energy Information Administration's Earley. "We are using energy a lot smarter."