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Gasoline Hits Average of $4 a Gallon

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Gasoline Hits Average of $4 a Gallon

Price Shock, Among the Worst in a Generation, 
Will Worsen the Risk of Recession
June 9, 2008; Page A1

The average price of gasoline in the U.S. hit $4 a gallon for the first time Sunday, the latest milestone in a run-up in fuel prices that is sapping consumer confidence and threatening to nudge the nation into recession.

The record nationwide average for regular-gasoline prices, announced by auto club AAA, follows Friday’s near-$11 surge in oil prices to a record $138.54 a barrel. Both are part of what, by some measures, is the worst energy-price shock Americans have faced for a generation, in terms of its toll on their pocketbooks.

In recent days, soaring fuel prices and disappointing employment data have reignited fears that the nation’s economy — which has taken a pounding over the past year from a housing downturn, credit crunch and weakening job market — will slip into recession, or pull back further if a recession is already under way. Rising fuel prices are straining household budgets, damping the spending that drives more than two-thirds of the nation’s economic activity.

“What we’re seeing here is a lot of additional pressure on a consumer sector that was soft to begin with,” said Alliance Bernstein economist Joseph Carson. “Is it a tipping point by itself? It’s close.”


Gasoline prices, which have risen 29% over the past year, have been high for months, and in some markets, such as Alaska and California, consumers have been paying more than $4 a gallon at the pump for weeks. But the latest increase at the nationwide level from a previous average of nearly $3.99 a gallon seems likely to deliver at least a psychological blow to many Americans.

The current drain on consumers’ income from rising fuel prices is greater than it was during most of the worst energy-price run-ups of the past. Spending on fuel as a share of wage income has shot above 6%. That exceeds the percentage seen during the 1974-75 and 1990-91 oil-price shocks and approaches the 7% to 8% seen during the 1980-81 price surge, according to Mr. Carson.

Comparing the rise in fuel spending to income growth, which has been especially weak in recent years, the current shock is far worse than any of the three prior ones, he said.

“It’s just gotten out of hand,” said 53-year-old Yvonne Brune of Des Moines, Iowa, referring to the rising cost of gasoline. Because of higher gasoline prices, Ms. Brune, who works for a printing company doing marketing on weekdays and separately as a bridal consultant on nights and weekends, no longer makes the drive home at lunchtime — a 30-mile round trip — to spend time with her dogs. Because of rising airfares, she has canceled plans for a trip to Texas to visit relatives. “I think the airlines are going to see their industry implode because people are going to stop flying,” she said.

Some economists hold out hope the current oil-price surge won’t be as devastating as some in the past. For one thing, consumers and businesses are far more fuel-efficient today than they were during the oil shock of the mid-1970s, requiring half as much energy to produce a unit of economic output.

Interest rates also are far lower than they were then, and the Federal Reserve is expected to hold its interest-rate target steady at 2% for much of this year. The dollar’s weakness, meanwhile, is raising overseas demand for American products, and growth in exports is a key reason why the U.S. economy has continued to expand — albeit slowly — over the past six months.

Most important, consumers have shown surprising resilience over the past five years, despite continued surges in their fuel costs. “While it certainly makes it tougher for the economy for the next few quarters, I still believe consumers can adapt,” said Peter Kretzmer, a Bank of America economist.

Still, as gasoline prices climb, they eat up money that consumers might otherwise spend on appliances or movie tickets or vacations. That could force businesses, hit by weaker consumer demand and an increase in their own costs, to pare operations and cut more jobs in an already weak labor market. The government reported Friday that the unemployment rate jumped to 5.5% in May from 5% in April as employers shed 49,000 jobs last month — a fifth-straight monthly decline.

Lessening the Impact

The government’s $168 billion economic-stimulus program, largely built around tax-rebate checks, is lessening some of the impact of the current shock. But gasoline prices have increased more than $1 a gallon since the economic-stimulus plan cleared Congress in February, suggesting consumers may have spent at least part of that money to fill their gas tanks.

At the same time, consumers are being buffeted by higher food prices. In Union, Ore., 78-year-old Dan Thompson has started to grow his own produce to avoid driving to a town 15 miles away to buy the increasingly pricey fruits and vegetables. “The gas prices, as far as I’m concerned, are criminal,” he said.

He and his wife also have decided to skip their customary summer trek to Arizona, Utah and Oregon to visit their children. “The kids live a day’s drive away or more,” he said. “We’re probably not going to be able do that this year.”

Oil companies say they have little control over soaring crude-oil prices, which they point to as the main cause of higher gasoline prices. Over the past months, the refiners who turn oil into fuels have been unable to pass the full increase in crude-oil prices through to consumers. As a result, while profits from producing oil have skyrocketed, major oil companies and independent refiners have seen earnings from their refining operations collapse.

Oil prices have been rising steadily from around $30 a barrel in 2003, at the start of the Iraq war. But the first few years of those increases occurred “in a period of strong growth, rising credit availability and rising house prices,” said Jan Hatzius, chief U.S. economist at Goldman Sachs.

The key question now: Will oil prices go back down, or remain elevated for the long run? A swift plunge in oil prices, even back to the relatively high level of $100 a barrel, would send gasoline costs lower and, as a result, ease pressure on consumers and improve their confidence in the economy.

Feeling the Pain

But if oil stays above $135 a barrel and gasoline tops $4 a gallon into the fall, that could reshape businesses and lead Americans to change their spending patterns in broader ways.

Already, auto makers, airlines, chemical companies and others that rely on oil are feeling the pain. Last week, Continental AirlinesInc. said it would cut 3,000 jobs, slash capacity by 11% and remove 67 airplanes from its fleet because of soaring jet-fuel prices. The move followed similar moves to cut capacity by UAL Corp.’s United Airlines and AMR Corp.’s American Airlines. Dow ChemicalCo., one of the world’s largest chemical manufacturers, is planning to raise its product prices up to 20% as a result of soaring costs for crude oil and natural gas.

Sales at many department stores are flat or declining, though warehouse clubs and discounters are reporting continued gains as shoppers seek bargains in the tough economic climate. Last week, Wal-Mart Stores Inc. and other discounters reported strong business, citing the government rebate checks, but that effect is expected to dissipate by year end.

Don Passman, a self-employed handyman, said the rising price of gas is increasingly eating into his profits.

Six years ago, filling the tank of his pickup truck cost Mr. Passman less than $30. Now, he is paying more than $70. Because of his job, which involves commuting from his home in Allen, Texas, about 25 miles northeast of Dallas, to clients’ houses in Dallas and other towns in the area, it is nearly impossible for him to cut back on driving. “I feel like I’m being held at knifepoint,” he said. “If they charge $10 a gallon, I’m going to pay it.”

Mr. Passman, 43 years old, sees the higher prices of oil filtering into the prices of everything else, from eggs to bread, while wages remain steady. “Anybody that’s not scared is not paying attention,” he said.

–Ana Campoy contributed to this article.

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