$4-a-gallon gas fueling fears for recovery

April 12, 2011

Gasoline prices are soaring toward $4 a gallon, a threshold that some analysts say will damage the fragile economic recovery and crimp consumer spending just as families are planning their summer vacations.

Higher prices saddle businesses with higher transportation costs, causing them to either swallow them or pass them along to already strapped customers. As gasoline costs go up, consumers are left with less money to spend elsewhere. And there is evidence that the hike at the pump is beginning to push drivers off the road.

Gasoline prices, which are approaching record levels, “are going to have a very profound effect on the economy,” said Peter Morici, an economist at the University of Maryland.

D.C. resident Amber Sutton, who drives 25 miles each way to her job in Woodbridge, said rising gasoline prices have caused her to cut back on restaurants and other entertainment.

“I already was spending a ton on gas,” she said. “But now it’s absolutely ridiculous.”

The average price for a gallon of regular gasoline Monday was $3.79 — up more than a dime from the previous week and 93 cents from a year earlier, according the Energy Information Administration. In California, the average is now $4.16, and prices are above $4 a gallon at some stations in the District and elsewhere.

Prices have risen so high, so fast that some market analysts predicted a sell-off in the short term. That sentiment sent crude oil prices tumbling Tuesday for the second consecutive day, dragging stock markets down about 1 percent, as evidence grew that escalating prices are beginning to threaten the global economic recovery.

But Morici and other economists say the pullback may only provide temporary relief at the pump and that higher prices could be here to stay.

Gasoline prices peaked in July 2008, when a gallon of regular sold for an average of $4.11 nationally. Some analysts fear prices could again approach that level in the near future, since demand for gasoline generally rises in the warm-weather months.

Nearly three-quarters of Americans says higher prices could slow their spending in other areas in the months ahead, according to a Deloitte survey of consumers’ spending intentions.

“We have an au pair from France, and she recently filled up our minivan and gave me a bill for $70,” said Melanie Janin, a mother of three from Bethesda. “I was like, ‘Oh, my God.’ ”

Already, motorists are cutting back on driving because of the increasing prices. “We are seeing some deterioration in U.S. motor gasoline demand . . . as pump prices near $3.75 a gallon,” which is when demand got soft in 2008, said David Greely, an analyst at Goldman Sachs. “As the market moves to higher prices, the likelihood that you’re going to weaken demand increases.”


Bill Simon, chief executive of Wal-Mart U.S., said recently that the retailer sees fewer customers when gas prices begin to rise, because its mammoth stores are typically farther away than local grocery and convenience stores.

But as the spike continues, customers begin consolidating shopping trips and are more likely to visit just Wal-Mart instead of a handful of smaller retailers, Simon said. “We know that gas prices are going to continue to challenge people.”

New reports from Goldman Sachs and the International Energy Agency were the triggers for Tuesday’s $3.67-a-barrel drop in the price on the New York Mercantile Exchange, where a barrel of the U.S. benchmark West Texas Intermediate closed at $106.25.

Oil prices above $100 will hurt the recovery, the IEA report said. “Economic impacts from high prices are never instantaneous, and often take months to materialize, but preliminary data for early 2011 already show signs of oil demand slowdown,” the IEA report said. “Unfortunately, the surest remedy for high prices may ultimately prove to be high prices themselves.”

Fears of continued Middle East unrest and the possibility that supply disruptions could spread beyond Libya have driven up the price of Brent crude, another key oil benchmark that is used by about two-thirds of the world, from $100 a barrel in mid-February to $125 a barrel last Friday, a level not seen since May of the record-setting 2008. Yet inventories and spare production capacity are bigger this year than they were then, Goldman noted.

Goldman Sachs analysts did not change their target prices, which are $105 a barrel for Brent much of this year with a rise to $120 a barrel by the end of 2012. Brent prices closed at $120.66 a barrel Tuesday, down $3.32, after reaching 21 / 2-year highs Monday.

Recent oil price hikes increasingly look like the result of speculation. Saudi oil ministry officials, worried that prices are so high that they might lower consumption, have contacted major oil companies offering additional supplies. But the firms responded that they have ample supplies.

“I think you are starting to see that the market might have overextended on prices,” said Frank A. Verrastro, senior vice president at the Center for Strategic and International Studies.

But even though crude prices are retreating, there is no telling how low they will go, or when the price decreases will show up at the pump, he said.

Staff writer Steven Mufson contributed to this report.

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