Friday, February 22, 2008

Mortgages are making headlines and record numbers of homes are in foreclosure, but it’s high energy prices that really bother consumers. It’s the top problem people cite when asked what is wrong with the economy.

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    Steven Roy, an Alexandria motorist, said he has looked for ways to conserve energy because he doesn’t expect gas prices to fall any time soon.

    “Demand worldwide keeps growing and so will the price,” he said. “If we get to the point where we have people selling apples on the street corners again, it may dip locally. But China and India will extract any excess on the market and we’ll be essentially in the same boat.”

    Despite the deep economic slump in the United States, international tensions and disruptions in supply sent oil prices soaring above $100 a barrel this week while gas prices jumped back above $3 a gallon — more than 75 cents higher than a year ago. Some analysts say pump prices could go higher this spring, even though demand for gasoline has flattened in the U.S., the world’s biggest consumer of fuel.

    High energy prices pose a powerful drag on consumer confidence and spending at a time when the economy needs their support more than ever. Consumer sentiment fell to the lowest levels since the 1991 recession earlier this month.

    Cutbacks in consumer use of fuel have deflated growth in U.S. demand for gasoline to nearly zero for the first time in years. Fuel use rose only 0.2 percent last year, according to the Energy Information Administration. In the past, such a major slowdown in an economy that uses a quarter of the world’s oil would have been enough to lower oil and gas prices.

    John Shagg, a Fairfax motorist, complained that people aren’t getting a break from high prices the way they used to when they cut back on driving.

    Oil prices are going up despite slow growth, he said, because the economic slump is causing a drop in the dollar. Since the price of oil is denominated in dollars, the falling dollar is prompting oil exporters and speculators to drive up the price of oil.

    Oil prices went up this week, even after Venezuelan President Hugo Chavez stopped threatening to cut off oil to the U.S. over a dispute with Exxon Mobil Corp., Mr. Shagg noted.

    “So how exactly does oil ever go down again? Every single factor just makes oil go up,” he said.

    The relentless rise in oil and gas prices is provoking anger and a sense of powerlessness among voters, and is a major reason the economy has become the top issue in the presidential campaign, according to a poll this week by Democracy Corps, a Democratic polling group. But it also has served to promote the biggest round of conservation seen in the U.S. since the 1970s.

    Fuel use and carbon emissions have slowed dramatically since 2003, even posting rare declines as prices soared. Consumers are getting constructive with their anger by finding ways to reduce energy use, taking simple steps such as turning down thermostats, tuning car engines and keeping tires inflated. Those looking to buy new cars have all but lost their appetite for gas-guzzling sport-utility vehicles.

    “Reducing demand is the quickest and most effective means to mitigate the impact of spiraling oil and gasoline prices,” said Kateri Callahan, president of the Alliance to Save Energy, a District-based advocacy group.

    Much waste can be cut without reducing quality of life, but some consumers — especially the low-income and elderly — cannot readily cut back or make the large investments in energy-efficient vehicles and appliances needed to cut their energy costs in the long run.

    Economists worry about the squeeze on those consumers, as well as the diversion of an increasing share of national income into paying for energy and away from other domestic businesses. The danger is particularly acute since the latest price spike is occurring at the same time that a toxic mix of other factors is holding down growth, including slowing job gains and a widening credit crunch.

    Federal Reserve Chairman Ben S. Bernanke in testimony last week noted that persistently high fuel prices are pressuring consumers and contributing to “sluggish” growth and a risk of recession this year. The Fed dramatically slashed interest rates last month because of the growing threats to consumers and the economy. Consumers generate about 70 percent of economic activity.

    Higher energy and food prices already have zapped consumer spending significantly, while lifting inflation to a 16-year high of 4.1 percent last year. The energy-led increase in inflation meant consumer spending at the end of last year barely grew at all when adjusted for price increases, while wages actually declined.

    The erosion of disposable income and purchasing power is a principal reason consumers are feeling defeated by high energy prices.

    “Retail sales the last two months were negative” when inflation is taken into account, said Bernard Baumohl, managing director at the Economic Outlook Group. “In other words, people weren”t actually buying more goods, just paying higher prices.”

    Mr. Baumohl thinks that “a consumer-led recession may now be under way, and that is something we have to take quite seriously, given their dominant role in the economy.”

    While economists are concerned about real and psychological impact of high fuel prices, most are not as alarmed as consumers themselves, who ranked worries about soaring energy costs ahead of most other economic problems in a survey last month by the Civil Society Institute, a nonprofit citizens group.

    More than half of consumers in the survey cited fuel prices as their top economic worry — ahead of other more-publicized fears about recession, the mortgage meltdown and joblessness.

    Consumers also were far more likely than oil authorities to expect further surges in gas prices, with 71 percent saying they expect gas prices to rise to $4 a gallon by summer. Oil analysts are divided on whether gas prices are headed up or down. Many suspect the decline in U.S. economic growth and fuel use will eventually bring down prices.

    Were $4 gas to arrive by spring, the “wobbly U.S. economy” would be in for further trouble, said Graham Hueber, a researcher at the Civil Society Institute.

    “Over half of Americans said that gas prices at $4 would cause them to cut back on summer or end-of-year holiday travel and nearly three out of five say they would cut back on personal spending to help pay for higher gasoline prices,” he said.

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