The cost of a gallon of gas has surged. Airlines are adding oil-related surcharges to flight tickets. And the Organization of Petroleum Exporting Countries has finally gotten its act together, cutting back production and helping force oil prices close to a nine-year high.
None of that is good news. But it doesn't necessarily mean disaster for the U.S. economy, analysts said, even though the past four recessions have been associated with higher oil prices.
That's because oil prices don't hold the same sway over the economy they once did. In the late 1970s, oil accounted for 8.7 percent of every dollar of gross domestic product. In these less oil- and energy-intensive days, it accounts for only 3 percent, said Larry Goldstein, president of Petroleum Industry Research Inc., an industry research company based in New York.
Three factors have contributed to the decline in the impact of oil prices on the U.S. economy, said Jay Hakes, who heads the federal Energy Information Administration. Less oil is used now than in the past to generate electricity; natural gas prices no longer track oil prices as they once did; and the economy has grown in non-energy-intensive areas such as services, he said.
"I think it is legitimate to say oil prices don't have the impact on the economy they once had, but it still has to be recognized there is a sizable impact," he said. "A lot of business today is conducted over the Internet, but most of the things you order are delivered in a truck."
Prices for light, sweet crude oil for March delivery rose 45 cents on the New York Mercantile Exchange yesterday, to $28.28 a barrel; at the end of 1998, prices reached a 12-year low of just under $11 a barrel. Meanwhile, a cold snap in the Northeast has sent demand for heating oil soaring, along with its price.
Heating oil customers, especially those on fixed incomes, will be feeling pain from higher prices, Hakes noted. That hits hard in the Northeast, where more customers use heating oil, and where the anticipated two-week shutdown of a Sunoco Inc. refinery in Marcus Hook, Pa., reduced supplies.
In the Washington metropolitan area, only 11 percent of homes use heating oil, while 61 percent use natural gas and the balance use electricity. Natural gas prices rose yesterday based on speculation that domestic supplies will be sufficient to meet heating demands from the continuing cold weather.
Oil prices have been bolstered not just by higher demand created by cold weather but also by the extraordinary resolve shown during the past year by the major oil-exporting nations in reducing production. Members of OPEC and other oil producers have held to an agreement aimed at cutting daily production by 7 percent.
Earlier this month, representatives from Saudi Arabia indicated that their government would support continuing production cutbacks beyond March 31. "Those comments were taken very seriously by the market," said Goldstein.
Most Washington area consumers will likely feel the impact of higher oil prices at the pump.
Retail prices for both unleaded gasoline and diesel fuel reached record highs over the past week, according to the Energy Department. Average pump prices on Monday for gasoline stood at $1.315 a gallon, up 3.8 cents from the prior week, and diesel fuel jumped 11.1 cents to $1.418 a gallon, based on the department's weekly survey of 800 service stations.
That puts gasoline at 38 cents a gallon more than a year ago, while diesel fuel is up 45 cents. This was the highest price for gasoline since the Energy Department began tracking weekly motor fuel prices in 1991, following Iraq's invasion of Kuwait. The department began reporting weekly diesel prices in 1994.
Locally, the average pump price is $1.31, according to AAA Mid-Atlantic spokesman Mantill Williams, up a penny a gallon from Dec. 17, when it hit its highest price since 1990. "The issue is not only how high prices get, but how long they stay high," Hakes said.
Oil prices tend to go up and down, often in sharp swings. As a result, many analysts, when they look at the inflation rate, factor out both oil and food prices, which can be sent sharply higher by events such as a hard freeze in Florida. Instead, they concentrate on the "core rate of inflation" as a better barometer of how the economy is performing.