5 Ways Rising Gas Prices Will Affect You

on March 22 2012 6:46 AM

Surging gasoline prices, up about 20 percent already this year, threaten the U.S. economic recovery and will almost surely be a factor in the presidential election.

As Democrats and Republicans blame each other for the increases -- crude for May delivery rose 1.1 percent, to $107.27, in New York Mercantile Exchange futures trading Wednesday -- the escalating prices are putting a direct hit on Americans' lifestyles, municipal budgets and the fortunes of businesses big and small.

There's no question that it has the potential to impact all industries in various stages, said Gregg Laskoski, a senior petroleum analyst for price-tracking service GasBuddy.com.

International Business Times notes five ways that sustained rising gasoline costs are affecting people's daily lives:

1. Consumer Spending

In February, the U.S. consumer price index rose 0.4 percent, its highest increase in 10 months. About 80 percent of that increase was driven by the cost of gasoline. Still, the balmy winter in much of the country means the effects of high-priced oil haven't been keenly felt. In fact, Americans saved $30 billion on heating fuel in January and February due to the unseasonable weather, according to David Rosenberg, chief economist at money manager Gluskin Sheff and Associates.

But as Americans start driving more in the spring and summer, they'll face at least a $50 billion cash-flow drag, Rosenberg said in a research note last week. And the end to the 'utility subsidy' means the loss of another $30 billion. Combined, that is akin to about a 1.5 percent wage cut for the household sector.

In response, many Americans will probably decide to put off purchases.

High fuel costs also directly affect the expenses of shipping and transportation companies, including giants United Parcel Service Inc. (NYSE: UPS), FedEx Inc. (NYSE: FDX) and the U.S. Postal Service. Because most such companies don't hedge against oil price increases, the heavier burden of running their delivery fleets is absorbed by consumers and other businesses.

We pass on the cost of fuel increases, UPS spokesman Dan McMackin said. All transportation companies do this in one fashion or another.

The U.S. Postal Service, which doesn't impose surcharges and is already in dire financial condition, said a 1-cent increase in the price of gas translates to about $7 million in added costs for its operations.

2. Jobs

The job market has been a welcome bright spot in the U.S. economy of late. Weekly claims for unemployment-insurance benefits are at four-year lows, and 227,000 jobs were added to the economy in February.

But high oil prices could upend this trend. A $20 increase in the cost of a barrel of oil cuts 0.4 percentage points off growth in gross domestic product and increases unemployment by 0.1 percent, according to a study by the Energy Information Administration, part of the federal Energy Department.

If the economy is already suffering from high inflation and unemployment, as in the late 1970s, then the oil price increases have the potential to cause severe damage by limiting economic policy options, the study said.

3. Food

In the modern food processing industry, oil is crucial for manufacturing, packaging and shipping. A February 2011 study from the U.S. Department of Agriculture found that of each dollar Americans spend on food, 7 cents is tied to the cost of energy.

That's a low estimate. It omits the substantial sums spent on energy in food services, such as at restaurants and workplace cafeterias, which account for 33 percent of all food costs. Nor does it include energy used for processing and packaging, which claim 19 cents of every dollar spent on food.

Given the role of energy in agriculture and other food-related activities, it's not surprising that the USDA forecasts a 2.5 percent to 3.5 percent rise in food prices this year, up from an increase of 0.8 percent between 2009 and 2010. In 2012, the U.S. agriculture industry's energy-related costs are estimated to total $61 billion, up from about $40 billion in 2006, according to Bob Young, chief economist for the American Farm Bureau Federation, an agribusiness trade group.

It's gone up substantially, said Young. A good chunk of the higher food costs have come from higher energy costs.

One farming sector might actually benefit from high oil costs: Ethanol, which is derived from corn and blended with crude to make a form of gasoline, could become a cheaper alternative to traditional oil-based fuels. But Young points out that ethanol production in the United States -- the world's No. 1 producer -- is already near capacity.

Some food-processing companies have begun hedging against expected increases in oil prices through derivatives contracts while shifting to the use of propane and natural gas to control climate conditions in their warehouses. In addition, farmers can implement strategic plans that minimize the impact of high-priced oil, such as buying oil-derived fertilizer when prices are low and planting soybeans, which require less fertilization than corn.

But inevitably, experts say, the food industry can't avoid the effect of more-expensive oil. You can only do so much, said Young. To a large extent, you just have to eat it.

4. Education

School districts in small towns and big cities have recently been hit with a double-whammy: Along with rising gas prices, schools are coping with budget cuts forced by reduced revenue from property taxes.

Florida's Miami-Dade County Public Schools, the fourth-biggest district in the United States, operates 1,325 buses and 1,704 other vehicles, including cars for school police, maintenance and food service workers. For every 10-cent increase in the price of diesel fuel, the district pays an additional $333,000, according to Patricia Snell, the district's transportation director.

While fuel is only a small part of the district's $4 billion annual budget, it has prompted changes to transportation policy, particularly in light of about $2 billion in budget cuts over the past four years.

In 2010, the Miami-Dade district streamlined more than 100 bus routes by increasing distances between stops and changing schools' opening and closing times to minimize the number of round trips the buses had to make. The transportation department also fired 255 workers, including supervisors, mechanics and drivers, and eliminated virtually all overtime.

Some communities are working to reduce dependence on oil. The Houston Independent School District acquired 27 propane-powered buses, and while they account for only a fraction of the district's nearly 2,000 vehicles, the greener buses run on $1.50-a-gallon propane, said Mark Swackhamer, senior manager of fleet operations. Houston also is installing global positioning system devices on some bus routes to improve efficiency and limit idling time to no more than five minutes.

Even cities that don't rely heavily on buses to get kids to school are feeling the pinch of higher oil prices. In the Los Angeles Unified School District, only about 10 percent of the 664,000 students in kindergarten to 12th grade take a bus to and from school. Due to California's financial crisis, however, Los Angeles has already increased the minimum distance for students eligible for school buses to three miles from two miles, consolidated transportation to school sporting events and lengthened some student commutes to as long as 90 minutes.

As fuel costs rise, it only makes it more difficult for us to grapple with the budget costs, said Donald Wilkes, the district's interim director of transportation services.

5. Travel

While international tourism to the United States is forecast to rise by 5 percent to 6 percent each year, according to the U.S. Commerce Department, industry officials are eyeing rising gas prices warily.

Fuel prices are among a number of economic indicators that we study on a regular basis, said Jeremy Handel, spokesman for the Las Vegas Convention and Visitors Authority. We are continuing to monitor them at this point, and we have not seen an impact to tourism thus far.

He said Las Vegas has seen year-on-year increases in visitor traffic for 23 consecutive months.

But other areas have already reacted. Colonial Williamsburg in Virginia is increasing its advertising campaigns in two Pennsylvania markets that are within a six-hour drive, Pittsburgh and Harrisburg, and minimizing promotional efforts in areas farther west, Sally McConnell, head of marketing communications for the historic district, told the Virginia Gazette.

In Florida, officials are tackling high gas prices head-on. The Greater Fort Lauderdale Convention and Visitors Bureau is offering those who book a two-night stay in certain hotels a $25 gas card. The bureau is prepared to spend up to $100,000 on the cards and another $100,000 to promote the offer, its president, Nicki Grossman, told the Sun Sentinel newspaper.

The cost of gasoline isn't expected to hurt car-buying significantly this year, according to analysts, but it may steer buyers toward hybrid and energy-efficient vehicles. Airline companies, including Delta Air Lines Inc. (NYSE: DAL) and United Continental Holdings Inc. (NYSE: UAL), have remained profitable by regularly raising fares, trimming capacity and filling more planes, but further increases in fuel costs will threaten their bottom lines.

Eyes On Iran

The effects of high oil prices are far-ranging. And current forces may tell only part of the story. If a military conflict erupts between Israel or the United States and Iran, the disruption to global supplies could push the price of crude to record highs.

Laskoski, the petroleum analyst, believes the price of crude could skyrocket to $200 a barrel, which would translate to U.S. retail gasoline prices of $7 per gallon or more if there is fighting over Iran. Such an outcome would have a devastating effect on the economy and beyond.

Like it or not, we are still a petroleum-based economy, he said.

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