energy
Rising Oil Prices Beginning to Hurt Economy
Paul Wiseman
aP economics Writer
WaShinGton (AP) — Just when com-
panies have finally stepped up hiring, rising
oil prices are threatening to halt the U.S.
economy’s gains.
Some economists are scaling back their
estimates for growth this year, in part
because flat wages have left households
struggling to pay higher gasoline prices.
Oil has topped $108 a barrel, the highest
price since 2008. Regular unleaded gasoline
now goes for an average $3.69 a gallon,
according to AAA’s daily fuel gauge survey,
up 86 cents from a year ago.
The higher costs have been driven by
unrest in Libya and other oil-producing
Middle East countries, along with rising
energy demand from a strengthening U.S.
Gasoline prices are
surging just as
inflation-adjusted
incomes are falling
economy.
Airlines, shipping companies and other
U.S. businesses have been squeezed. The
rising prices are further straining an econo-
my struggling with high unemployment and
a depressed housing market.
“The surge in oil prices since the end of
last year is already doing significant dam-
age to the economy,” says Mark Zandi,
chief economist at Moody’s Analytics.
Unlike other kinds of consumer spending,
gasoline purchases provide less benefit for
the U.S. economy. About half the revenue
flows to oil exporting countries like Saudi
Arabia and Canada, though U.S. oil compa-
nies and gasoline retailers also benefit.
For consumers, more expensive energy
siphons away money that would otherwise
be used for household purchases, from cars
and furniture to clothing and vacations.
High energy prices are “putting a drain on
consumer budgets,” says James Hamilton at
the University of California, San Diego. “To
the extent they’re having to spend more on
gasoline, they have to make cutbacks else-
where.”
Two-thirds of Americans say they expect
rising gasoline prices to cause hardship for
them or their families in the next six
months, according to a new Associated
Press-GfK Poll. The telephone poll con-
ducted March 24-28 had a sampling error
margin of plus or minus 4.2 percentage
points.
Seventy-one percent say they’re cutting
back on other expenses to make up for high-
er pump prices. Sixty-four percent say
they’re driving less. And 53 percent say
they’re changing vacation plans to stay
closer to home.
“I try to leave the car parked at home all
day Saturday,” says Curt Lindsay, who
commutes an hour each way to his job as a
computer systems administrator outside
Washington, D.C. “I’d rather not spend the
money on gasoline.”
Since gasoline prices topped $3 a gallon,
Lindsay has also been trying to drive more
slowly to conserve fuel.
His co-worker Albert Zaza canceled fam-
ily trips to New York and Boston after the
cost of filling up his Honda CRV surged
from $35 to $47. Zaza spends four to five
hours in traffic each day and has to fill up
every other day.
Rising fuel prices are pinching businesses
too.
In Tipton, Iowa, Grasshopper Lawn Care
is tacking 5 percent onto customers’ bills to
compensate for higher fuel costs. The com-
pany has to buy more than 8,000 gallons of
gasoline a year. It plans to keep the sur-
charge until gasoline prices dip back below
$3 a gallon, owner Dan Kessler says.
The oil shock and global instability are
diluting the benefits of an improving job
market. The unemployment rate, though
still high, is at a two-year low. And the
economy has just produced the strongest
two months of hiring since before the reces-
sion began.
Bernard Baumohl, chief economist at the
Economic Outlook Group, has slashed his
estimate for growth this year to 2.8 percent
from 3.5 percent. In 20010, the economy
grew 2.9 percent.
Consumer spending accounts for about 70
percent of the economy. After adjusting for
inflation and for seasonal factors, con-
sumers spent 0.3 percent more in February
than in January.
But that’s unlikely to last. Gasoline prices
are surging just as inflation-adjusted
incomes are falling. More expensive gas is
draining much of the cash Americans are
receiving from a cut in Social Security taxes
this year.
Zandi estimates that higher oil prices
shaved 0.5 percentage point from growth in
the January-March quarter. He predicts the
economy grew 2.6 percent during the quar-
ter.
If oil prices average $100 a barrel for the
year, Zandi says, growth will be 0.3 per-
centage point lower than if prices had
stayed at last year’s level - an average of
less than $80 a barrel. A few months of
$125-a-barrel oil would slash economic
growth by a full percentage point, Zandi
says. And a few months at $150 a barrel
could push the economy back into reces-
sion.
april 6, 2011 The Portland Skanner Page 11