[Marxism] Economic impact of $200 per barrel oil
lnp3 at panix.com
Sat Jun 28 06:38:00 MDT 2008
From the Los Angeles Times
Envisioning a world of $200-a-barrel oil
As forecasters take that possibility more seriously, they describe
fundamental shifts in the way we work, where we live and how we spend
our free time.
By Martin Zimmerman : times staff writer
June 28, 2008
The more expensive oil gets, the more Katherine Carver's life
shrinks. She's given up RV trips. She stays home most weekends. She's
scrapped her twice-a-month volunteer stint at a Malibu wildlife
refuge -- the trek from her home in Palmdale just got too expensive.
How much higher would fuel prices have to go before she quit her job?
Already, the 170-mile round-trip commute to her job with Los Angeles
County Child Support Services in Commerce is costing her close to
$1,000 a month -- a fifth of her salary. It's got the 55-year-old
thinking about retirement.
"It's definitely pushing me to that point," Carver said.
The point could be closer than anyone thinks.
Three months ago, when oil was around $108 a barrel, a few Wall
Street analysts began predicting that it could rise to $200. Many
observers scoffed at the forecasts as sensational, or motivated by a
desire among energy companies and investors to drive prices higher.
But with oil closing above $140 a barrel Friday, more experts are
taking those predictions seriously -- and shuddering at the
inflation-fueled chaos that $200-a-barrel crude could bring. They
foresee fundamental shifts in the way we work, where we live and how
we spend our free time.
"You'd have massive changes going on throughout the economy," said
Robert Wescott, president of Keybridge Research, a Washington
economic analysis firm. "Some activities are just plain going to be shut down."
Besides the obvious effect $7-a-gallon gasoline would have on
commuters, automakers, airlines, truckers and shipping firms, $200
oil would drive up the price of a broad spectrum of products:
Insecticides and hand lotions, cosmetics and food preservatives,
shaving cream and rubber cement, plastic bottles and crayons -- all
have ingredients derived from oil.
The pain would probably be particularly intense in Southern
California, which is known for its long commutes and high cost of living.
"Throughout our history, we have grown on the assumption that energy
costs would be low," said Michael Woo, a former Los Angeles city
councilman and a current member of the city Planning Commission. "Now
that those assumptions are shifting, it changes assumptions about
housing, cars and how cities grow."
Push prices up fast enough, he said, and "it would be the
urban-planning equivalent of an earthquake."
With every penny hike in the price of gas costing American consumers
about $1 billion a year, sharply higher pump prices would lead to
"significant bankruptcies and store closings," said Scott Hoyt,
director of consumer economics at Moody's Economy.com.
Consumer spending has held up surprisingly well in the face of
skyrocketing pump prices -- bolstered in part, perhaps, by federal
tax rebates. But the same day the government reported a 0.8% rise in
May consumer spending, a research firm said consumer confidence had
plunged to its lowest level since 1980 -- hinting at the catastrophic
effect another big gas price surge could have on retailers and customers.
"The purchasing power of the American people would be kicked in the
teeth so darned hard by $200-a-barrel oil that they won't have the
ability to buy much of anything," said S. David Freeman, president of
the L.A. Board of Harbor Commissioners and author of the 2007 book
"Winning Our Energy Independence."
BIGresearch of Worthington, Ohio, said more than half of Californians
in a recent survey said they were driving less because of high gas
prices. Almost 42% said they had reduced vacation travel and 40% said
they were dining out less.
If any retailers would benefit, it would be those on the Internet. In
a recent survey by Harris Interactive, one-third of adults said high
gas prices had made them more likely to shop online to avoid driving.
Restaurant operators such as Brinker International, which owns the
Chili's and Romano's Macaroni Grill chains, are suffering and are
likely to struggle even more as consumers look for ways to reduce
spending. Fast-food chains wouldn't be immune, experts say, although
they might fare better as families downscale their dining choices.
Vehicle sales, too, would probably continue to tank. Sales of new
cars, sport utility vehicles and light trucks fell more than 18% in
California in the first quarter compared with a year earlier.
Although some consumers have been shopping for smaller, more
fuel-efficient vehicles, many dealers are demanding premiums for
gas-sipping hybrids, wiping out much of the financial advantage of buying one.
Nationwide, $200 oil and $7 gasoline would force Americans to take 10
million vehicles off the roads over the next four years, Jeff Rubin,
chief economist at CIBC World Markets, wrote in a recent report.
As for the state's beleaguered housing market, prices are falling
faster in areas requiring long commutes -- such as Lancaster and
Palmdale -- than in neighborhoods closer to job centers.
Sky-high gas prices "would basically reorient society to where
proximity would be more valuable," said Tom Gilligan, finance professor at USC.
Americans may also feel the effects of a rise in energy-related
crime. Ads for locking gas caps are becoming more prevalent.
Restaurant owners are complaining that thieves are helping themselves
to used barrels of cooking oil, which can be home-brewed into biodiesel fuel.
Workers stuck with long commutes and gas-guzzling cars would look
increasingly to public transit, experts say.
Already Californians' mobility is being curbed. Traffic on the
state's freeways fell almost 4% in April compared with a year
earlier, and ridership on many subway and bus lines operated by the
L.A. County Metropolitan Transportation Authority has risen in recent months.
But a huge influx of riders would strain aspects of the system, MTA
says, noting that many buses are overcrowded at rush hour now.
Quickly adding capacity to meet demand from new riders wouldn't be
easy, because new buses cost hundreds of thousands of dollars and
take up to two years to deliver.
Transit advocate Kymberleigh Richards said new riders on popular
routes such as Wilshire Boulevard, Vermont Avenue or Sherman Way in
the San Fernando Valley "are going to have a bit of a culture shock.
It's a different world to be using public transit when you're used to
being in your own vehicle by yourself."
Just how many drivers would become public-transit riders if oil
surges to $200 a barrel is hard to predict, but there's a big pool of
potential customers. About 87% of Southern Californians commute by
car, according to 2005 data from transportation expert Alan Pisarski.
That compares with 63% in New York and its environs.
Travelers can also expect much fuller airplanes and much more
expensive flights -- when they're available at all. Delta Air Lines
Inc., for example, recently said it was cutting about 13% of its
flights from Los Angeles International Airport to save fuel.
It also could mean shifting flights from outlying airports such as
Ontario to LAX to cut overhead costs, said Jack Kyser, chief
economist for the Los Angeles County Economic Development Corp.
Carriers probably would also trim flights in highly competitive air
corridors such as L.A. to the San Francisco Bay Area.
Even the cost of getting away from it all on Santa Catalina Island
would go up. Greg Bombard, president of the Catalina Express ferry
service, has trimmed schedules, raised fares and reduced hiring to
make up for fuel costs that have risen sevenfold since 2002. Another
big increase and he says he'll have to ask state regulators, who
control his rates, to OK another fare hike.
The fee increases on the ferry would be nothing compared with the
added cost of transoceanic shipping if oil goes to $200. Some experts
say high energy costs are altering global trade and slowing the pace
It takes about 7,000 tons of bunker-fuel to fill the tanks of a
5,000-container cargo ship for a trip from Shanghai to Los Angeles.
Over the last year and half, the cost of that fuel has jumped 87% to
$552 a ton, according to the World Shipping Council, boosting the
cost of a fill-up to more than $3.8 million.
"To put things in perspective, today's extra shipping cost from East
Asia is the equivalent of imposing a 9% tariff on East Asian goods
entering North America," said Rubin of CIBC World Markets. "At $200
per barrel, the tariff equivalent rate will rise to 15%."
If oil continues to rise from current levels, officials at the Port
of Los Angeles believe West Coast ports would gain business because
they are 10 to 12 days' sailing time from Asia, versus the
18-to-20-day route from Asia to the East Coast through the Panama Canal.
But local ports could lose business if shipping costs get so out of
hand that companies begin shifting production back to North America
from Asia -- something that's happening in the steel industry, Rubin said.
Local distribution patterns could change too. Stephen Gaddis, chief
executive of Pacific Cheese Co., a Hayward, Calif., cheese processing
and packaging firm, thinks high fuel prices will push restaurants,
retailers and food manufacturers to look for suppliers closer to
"Local sourcing is ideal. You won't pay as much for freight, and when
you use less fuel it's better for the environment," Gaddis said.
Soaring diesel prices will make companies rethink whether they should
have large, centralized plants or build smaller ones around the country.
That's what Pacific Cheese is doing. It's building a packaging plant
in Texas to be closer to one of its larger suppliers and expects to
serve its Southwestern clients from there.
In the near future, however, consumers can expect to pay for the
higher cost of producing food and moving it around the country, say
food executives, farmers and economists. Even having a deep-dish
pizza with extra cheese brought to your door costs more now that
chains such as Pizza Hut are charging for delivery.
Dramatically higher transportation costs would usher in an era of
virtual mobility, or zero mobility, for many workers.
"We're seeing companies go to four-day workweeks, place increased
emphasis on working at home, show bigger interest in setting up
satellite offices -- anything that gets commute times down and gets
people off the road," said analyst Rob Enderle of Enderle Group in San Jose.
Videoconferencing, touted as "the next big thing" for years, would
finally have its day, thanks to improved technology and a desperation
to cut corporate travel budgets.
Telecommuting, or working from home, is easier than ever because of
the spread of high-speed Internet access, said Jonathan Spira, chief
analyst at Basex Inc., a business research firm in New York. In
particular, workers in "knowledge" jobs that can be performed with
computers and phones would benefit.
But Gilligan of USC noted that lower-income workers tend to be in
jobs that don't favor telecommuting, such as retail and food service.
"These are the same people who are already being creamed by the
mortgage crisis," he said. "The impacts of energy price increases are
Although white-collar workers may be able to telecommute, they could
also take a serious financial hit because soaring energy prices tend
to wreak havoc on the stock market. The explosion of 401(k) plans and
similar retirement accounts in the last few decades -- and the
decline of traditional pensions with guaranteed payouts -- have tied
workers' financial futures more closely to stocks than they were
during the 1970s oil shocks. A prolonged Wall Street downturn could
mean a no-frills retirement, or none at all.
It wouldn't all be bad, of course. Some industries could boom,
providing jobs and tax dollars. California has seen a jump in
drilling activity as oil companies try to extract more crude from the
state's fields. Regulators expect a record 4,000 wells to be drilled
in the state this year.
"Every rig and every crew that's available is working right now,"
said Hal Bopp, the state's oil and gas supervisor.
And as rising oil prices make alternative-fuel vehicles more
cost-effective, California companies such as Tesla Motors Inc., which
recently began production of a $100,000 all-electric sports car,
could become important leaders in an emerging industry.
Tourist attractions may also see an upswing in local business as
families look for less-expensive vacation alternatives close to home.
A recent survey by travel insurer Access America found that 26% of
Americans would cut back on recreational travel as a first response
to higher gas prices.
In Southern California, with its many natural wonders, theme parks
and other attractions, the prospect of a "staycation" may be less
disappointing than for a resident of, say, Nebraska. And movies, a
staple of the local economy, may prosper as Americans seek escapism
and a (relatively) cheap night out.
And spending less time stuck in traffic on the 405? Priceless.
"More carpooling, fewer people on the freeways, more telecommuting --
in many ways, what would happen is what people have been trying to
make happen for a long time," USC's Gilligan said.
Times staff writers Ken Bensinger, Leslie Earnest, Jerry Hirsch,
Peter Pae and Ronald D. White contributed to this report.
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