Gas prices expected to jump
NEW YORK -- Jim Ammons grumbles to himself every time he fills up his Ford Expedition, but he says gas prices would have to almost quadruple to $10 a gallon before he would ditch his SUV.
Still, paying $55 to fill his 20 gallon tank isn't easy for the information specialist.
"This right here is catastrophic for a lot of families," Ammons, 54, said this week at a Houston Chevron station that was charging $2.65 a gallon for regular unleaded. "A lot of them have to choose: Do I buy food, do I send my kids to school or do I fill up my tank."
That choice may soon get a lot more difficult. The steep rise in oil prices to $90 a barrel over the past month means American consumers are almost certain to pay more for gasoline, heating oil, airline tickets and even food and goods that have to be transported great distances, experts say.
Some analysts are now predicting oil could go as high as $120 a barrel, but others argue underlying supply and demand fundamentals do not support such a spike and that a drop in prices is more likely.
What is clear is oil has become a magnet for "hot money" from hedge funds and other momentum investors betting the trend for higher prices still has a way to run. The dollar's decline, which makes dollar-denominated oil futures a bargain to overseas investors, also has played a role in the recent runup.
Absent an astounding rise in prices, few economists expect high energy costs alone to push the economy into a recession, as previous oil price shocks did in the 1970s and early 1980s. That's because the economy has become more energy efficient, and incomes have grown faster than energy costs. On a percentage basis, the country spends half the amount on energy today than it spent in 1980.
Gasoline prices now average $2.76 a gallon across the country for unleaded regular, according to the Energy Information Administration. While that's down almost half a dollar from their May peak, pump prices are still 53 cents higher than a year ago.
According to the AAA, the average cost of a gallon of self-serve unleaded regular gasoline in the Chicago area was $2.915 Friday.
Gas prices usually fall sharply after Labor Day -- they dropped 62 cents last year between the end of August and mid-October, for instance. But this year, prices have actually risen slightly since summer's end. In part, that's because oil futures jumped 30 percent since late August, topping $90 a barrel for the first time ever on Thursday.
Falling prices for ethanol, a gasoline additive, and rising imports of refined gasoline, which have helped keep supplies adequate, have played a role in keeping retail prices relatively subdued. But that's not expected to last -- many analysts now expect prices to rise by at least 10 to 15 cents a gallon, or more if oil pushes even higher.
"Consumers will now see higher prices at the pump in the coming months and weeks," said John Kilduff, vice president of risk management at MF Global UK Ltd.
Oil's rise has been impressive. In 2003, New York Mercantile Exchange oil futures averaged $31.08 a barrel. The march higher in the following four years by almost $60 a barrel has increased the U.S. economy's total energy expense by an additional $250 billion a year, said Lester Lave, a professor of economics at Carnegie Mellon University's Tepper School of Business.
On Friday, light, sweet crude fell 87 cents to settle at $88.60 on the Nymex. Oil futures rose $4.91 last week.
The government expects heating oil costs to jump 22 percent this winter. Demand may slip a little, but there's only so much homeowners dependent on that fuel source can do to cut back, especially if it turns out to be an unusually cold winter. The result may be less spending on other goods and services, which could hurt economic growth.
Higher jet fuel costs are already restraining airline earnings. For instance, Goldman Sachs analyst Robert Barry recently cut his fourth quarter earnings estimates for Delta Air Lines Inc. from 29 cents to 6 cents due to rising fuel costs. Spot jet fuel prices at New York Harbor rose to $2.42 a gallon this week, up from $1.80 a gallon a year ago, according to the EIA.
Airlines manage rising fuel costs in part by bumping up prices, said Philip Baggaley, an analyst at Standard & Poor's. But prices can only rise so far before they hurt demand.
Diesel prices are averaging about $3.04 a gallon, 54 cents higher than a year ago, and the American Trucking Association estimates the industry's total bill will jump $5 billion this year to $108 billion.
Ultimately, higher costs trickle down to the consumer, though Bob Costello, chief economist for the ATA, said it's not easy to quantify how much. "You and I are eventually going to see something at the store," he said. "How much, there's no way for me to say."