Pain Just Starting as High Fuel Prices Work Their Way Through Economy --Layoffs and surcharges already have resulted. Without relief, another recession is possible.
<a href=www.chicagotribune.com>WAR WITH IRAQ From the Los Angeles Times By Warren Vieth and Aparna Kumar Times Staff Writers Published March 25, 2003
WASHINGTON -- Like a slow-acting toxin, higher energy costs are seeping through the economy.
Gerald Lasseigne, a 53-year-old information systems technician in Donaldsonville, La., lost his job last month when steep natural gas prices forced Triad Nitrogen to shut down its fertilizer plant on the banks of the Mississippi River.
Daylight Transport, a freight company in Long Beach, recently boosted the diesel fuel surcharge it adds to customers' bills. At DuPont Inc. in Delaware, higher energy costs are woven into every strand of Lycra, Dacron and Kevlar the company produces.
Crude oil and natural gas prices have been volatile this year, buffeted by anxiety over war in Iraq and supply concerns related to a cold winter in much of the U.S. Crude prices, which had peaked at nearly $38 a barrel before the conflict started, did beat a retreat when it seemed a vigorous U.S.-led military offensive could bring a quick end to the standoff with Saddam Hussein without severe damage to Iraq's oil fields.
But oil prices rebounded Monday, climbing to more than $28 a barrel, marking their biggest gain in 15 months. By contrast, for most of the 1990s, oil traded below $22 a barrel. And natural gas futures prices now are more than double their average during the 1990s.
A few pennies a gallon here, a few dollars a barrel there, and pretty soon a million jobs are hanging in the balance.
If there's no relief from high prices, Americans could find work harder to come by because the economy will grow more slowly, and a double-dip recession won't be out of the question. Layoffs already have hit airlines and might reach other hard-hit sectors such as chemicals. Profits are bound to be squeezed elsewhere, from automakers to fast-food chains. Pump prices and utility bills could remain stubbornly high, leaving consumers with less money to spend on everything else.
"The energy shocks of the '70s and early '80s arguably were more significant," said chief economist Mark Zandi of Economy.com. "But this is significant enough to make a difference, certainly enough to push us back into a recession."
In Louisiana, Triad needs to keep its natural gas costs below about $3.50 per thousand cubic feet to break even, Lasseigne said. At the time he and 40 others were laid off, natural gas was selling somewhere north of $5.
"Nobody wants to lose their job, especially the way we lost ours, but I can't say I'm bitter to the company," said Lasseigne, a 29-year veteran of Triad who was earning about $60,000 annually when the well went dry.
"I think the government should have stepped in a couple of years ago when they had that energy fiasco in California. And I think the oil companies should have opened up some of those wells they capped back during the energy crisis years, knowing that if they held back production, prices were gonna rise."
And rise they did. In the early 1970s, U.S. refiners were paying about $3.50 a barrel for crude oil, while industrial natural gas users such as Triad were paying about 40 cents per thousand cubic feet. Then came the Arab oil embargo in 1973, the Iranian revolution in 1978 and the Iran-Iraq war in 1980.
Both crude oil and natural gas prices have increased tenfold over the years, bouncing up and down in response to periodic wars, recessions, natural gas "bubbles" and OPEC production decrees.
Last week, many oil traders were betting on a "perfect war" scenario: Hussein's forces would be quickly vanquished, Middle East oil exports wouldn't be disrupted and the price of crude would fall back to the low $20s.
Some experts have been less sanguine. At Goldman Sachs, for example, analysts and economists concluded that even if the war were to go well, crude oil would still cost an average of $30 or more this year.
That's because there is more propping up oil prices than just Iraq: Inventories of oil and petroleum products are dangerously low, the strike in Venezuela has taken some production off-line and political unrest in Nigeria is reducing exports from one of OPEC's biggest producers.
Meanwhile, a long-term imbalance in natural gas markets is expected to keep pushing that commodity's price up.
Higher energy prices sap the economy because they force consumers and businesses to pay more for purchases over which they have relatively little control, leaving them with less to spend on discretionary goods and services. Petroleum price spikes are particularly pernicious because America imports nearly 60% of its crude oil; that money goes straight into foreigners' pockets and is not recycled into the U.S. economy.
Economists say a $10-per-barrel increase in oil prices, if sustained for a year, slows the economy's growth rate by about half a percentage point and reduces disposable income by $50 billion, or about $400 per household. That's enough to add a percentage point or so to the unemployment rate as some hard-hit industries lay off workers and others create fewer new jobs.
"By themselves these impacts aren't all that large," said Goldman Sachs economist Jan Hatzius. "The big question is whether we're approaching the tipping point. We're dealing with an economy that's already pretty weak."
For some industries, higher energy prices could be toxic. Jet fuel accounts for 12% of U.S. airlines' operating costs, and analysts say higher prices, combined with post-Sept. 11 declines in passenger traffic, could push additional carriers into bankruptcy. Ground shippers, railroads and air freight companies feel the pinch, too.
Higher prices already have taken a toll on manufacturers of chemicals, plastics, textiles, paper, fertilizer, soap, paint, synthetic rubber and other products that use petroleum and natural gas as feedstocks and energy sources.
A number of chemical and plastics companies have reported lower profits, announced product price hikes or shut down production.
DuPont says a 10% increase in crude oil prices increases its raw material costs by about $100 million a year, while a 10% increase in natural gas adds about $65 million.
"The run-ups in oil and gas prices from last November and December are now flowing through to the prices of some of our feedstocks," said Ray Anderson, DuPont's director of investor relations.
In the last 30 days, family-run Beardsley and Son Inc., an agricultural services fertilizer company in Oxnard, has been paying $10 to $20 more per ton for fertilizer. "I'm passing along the price -- all of it," said President Tom Beardsley. "I've talked to growers about these prices. Their typical take is, 'What choice do we have?'"
A $1-per-barrel increase in the price of crude oil costs Goodyear Tire & Rubber Co.'s North American Tire division $20 million a year, after a similar lag period of up to six months. "In the past, we have sought price increases to cover our raw material costs," said Goodyear spokesman Clint Smith. "We did that last year."
Less directly affected, but still vulnerable, are industries that depend on consumers' discretionary dollars, including hotels, casinos, restaurants, clothing chains and other retail outlets.
Analysts say the businesses hit hardest are those that cater to low and middle-income consumers because gasoline and utility bills claim a bigger share of their disposable income.
The Goldman Sachs analysis noted that Wal-Mart Stores Inc.'s same-store sales fell between 2% and 4% in recent months as energy prices increased 30%. While all restaurants could be hurt, the firm predicted a potentially bigger effect at KFC and other fast-food chains with higher numbers of inner-city patrons. Similarly, profits could be squeezed at lenders such as Providian Financial Corp. that extend credit to low-income borrowers.
Manufacturers of many brands of automobiles and everything that goes into them are expected to suffer as car purchases and vacation travel are put on hold.
As with any spin of the economy's big wheel, however, there are always some who profit from others' losses. In this case, it's makers of fuel-efficient cars.
Jerry Daniels, general manager of Coggin Honda in Jacksonville, Fla., said he expects to sell between 300 and 350 new Hondas in March, compared with about 185 in a normal month. That would be the best sales month in the dealership's 20-year history.
There is even a waiting list for the Honda Insight, a gas-electric hybrid that gets 48 miles per gallon. "We've had considerably more trade-ins of V-8s in the last couple of weeks than we're used to getting," Daniels said.
Why? "Because of the gas prices, absolutely."
For Daylight Transport in Long Beach, the problem is the price of diesel, which in the last month topped $1.70 a gallon. Scott Riddle, vice president of sales and marketing, said Daylight charges customers a fuel surcharge of 6% -- up from the 1% surcharge of last year.
Fuel for the hundreds of trucks and trailers that haul freight around the country is a "huge expense," Riddle said. "Fortunately for us, we have a component to recover some of the costs. We're passing along the increase in costs to our customers to help bear some of the burden."
One customer, Peter Pepper Products Inc., a Compton-based office supplies maker, does the same: It passes the surcharge right along. But Bob Caseres, vice president of manufacturing, said clients understand.
"Everyone is accepting it as a course of business," he said. "Since we don't have a way around it, we just deal with it."
Times staff writers Elizabeth Levin and Hanah Cho contributed to this report.