Kuwait Times

Published Date: June 22, 2008
By Joanne Morrison

The wrenching adjustments US consumers and businesses have begun to make to cope with sky-high energy costs mark the start of a painful process that should lead to a more energy-efficient, resilient economy.

US households, forced to spend more at the gasoline pump, are shifting away from pricier items and cutting down on miles driven, while companies are planning to invest in more energy-efficient equipment to control costs. Oil prices, which hit a record high near $140 a barrel earlier this month, are up about 40 percent so far this year.

While they are likely to stabilize, they are not expected to fall back to anywhere near the $66 a barrel seen in 2006 before the economy stumbled. Instead, government estimates see prices averaging $122 a barrel this year and $126 in 2009.

The relentless oil-price surge has pushed the cost of gasoline to record heights as well. Over the past year, US gasoline prices have risen more than $1 a gallon to above $4 a gallon.

For consumers, every penny increase at the pump translates into $1 billion in spending. So far, consumers have spent about $80 billion more for gasoline this year alone. These soaring costs have brought back the specter of 1970s-style stagflation. But analysts say things are not as dire now because the economy is more energy efficient than it was 30 years ago. While oil accounted for about 7 percent of US gross domestic product in the 1970s, it accounts for only about 3 percent today.

Still, the energy-price run-up has whittled away at that gap and economists say the United States will need to adapt to the emerging reality of a higher cost environment and become even more efficient. "How we deal with this will depend on how we in the US are able to diversify our industrial base and job market," said Saifur Rahman, of the IEEE Power and Energy Society, an association of energy engineering professionals.

There are signs businesses are taking the needed steps. At shipping giant FedEx Corp higher fuel prices have cut into earnings and are expected to do so again next year.

The operating environment for fiscal 2009 is expected to be very difficult due to the weak US economy and extremely high fuel prices," Alan Graf Jr., the company's chief financial officer, said in the company's latest earnings statement.

FedEx said "significant investments" in more fuel-efficient aircraft would account for the bulk of its $3 billion in capital spending for this year. In a weak economy, it is very hard for businesses to pass their higher fuel costs on to consumers, so improving efficiency is key to protecting profits.

Over the longer haul, you are going to see the capital stock start to adjust," said Peter Hooper, chief economist at Deutsche Bank. Consumers have also begun to change their behavior.

Miles driven fell for a sixth straight month in April, resulting in the biggest six-month drop since the oil shock of the 1979-80 Iranian revolution, according to government data.

Americans are shifting to more fuel-efficient cars, and all three US carmakers are rushing small cars to the market, long dominated by imports. Ford is adding a third shift to its Wayne, Michigan, assembly plant and speeding up the speed of the line to ramp up production of the small Ford Focus sedan.

At the same time, sales of sport utility vehicles and light trucks are off sharply, and Ford is cutting truck production at six US plants. Cambridge Energy Research Associates, an energy advisory group, said on Thursday that gasoline demand would likely decline in 2008 for the first time in 17 years.

This new frugality is cutting into the nation's huge appetite for oil. The Energy Department is forecasting that US total oil demand will drop 1.4 percent this year. Shopping patterns are also shifting. While consumers can't substitute what they put in their gas tanks or how they heat their homes, they can and have changed where they shop for items ranging from clothes to food in a search for lower prices. Sales results show pricier department stores taking a hit amid a consumer-spending slowdown, as disco
unt chains draw more shopper traffic.

According to industry tracking firm Retail Metrics, sales at discounters, excluding Wal-Mart, rose 3 percent in May. While that was off from the 5.8 percent rise a year ago, it was a far cry from the 3.5 percent drop pricier stores suffered.

Americans are also eating out less. A study by Chicago-based Mintel International showed that more than half of the people who dine out regularly are cutting back on restaurant spending.

People aren't trading down for cheaper or lower quality food: they're just trading out," said David Morris, senior analyst at Mintel. - Reuters