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Higher Oil Prices Soon To Squeeze Consumers

According to many economists, including those at the Federal Reserve, the rise in oil prices has shaved about $75 billion off the nation's economic growth so far this year and is continuing to restrain business and individual spending. However, the effect on prices, employment and consumer pocketbooks has been muted for a variety of reasons.

Energy costs now make up just 7 percent of all household expenditures, with gasoline accounting for less than half of that. Meanwhile consumer inflation overall has been relatively tame in recent months, though many economists forecast it to rise in the months ahead.

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Even at more than $50 a barrel, oil is still cheaper after adjusting for inflation than it was when it peaked in 1981 at about $80 a barrel in today's dollars.

In addition to the increased efficiency of existing companies, economic growth has come increasingly from service sector firms that consume less energy than older industries, many of which have moved offshore.

San Francisco-based Levi Strauss & Co., which once operated dozens of U.S. apparel factories, closed its only remaining one last year and now describes itself as a design and marketing company.

The manufacturers that have remained and grown, and which account for about a fourth of the nation's total energy consumption, are themselves more fuel efficient.

The value of U.S. manufacturers' production grew by 45 percent from 1992 through 2003, after adjusting for inflation, said David M. Huether, chief economist of the National Association of Manufacturers. Yet the sector's energy use rose only slightly. As a result, by last year, manufacturers overall used 32 percent less energy per dollar of output, he said.

With oil accounting for a smaller portion of overall costs, it becomes easier for businesses to absorb temporary increases. This is particularly true for the many companies that have enjoyed strong profit growth over the last year.

This reduction in oil-dependence has been achieved through a variety of ways, including the increased use of oil alternatives.

Gannett Co., for example, publishes about 100 daily newspapers across the country, including USA Today, using soy-based color inks instead of the oil-based color inks it gave up roughly 10 years ago.


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