Oil's Surge Causing Major Changes in US Economy

Oil's relentless price rise has pushed U.S. drivers off the road, curbed consumers' appetite for expensive goods, forced airlines into their deepest cuts in years and threatened car makers with a flood of red ink.

It all points to a dramatic shift in the U.S. economy as oil's surge above $130 per barrel forces already cash-strapped households and companies to rethink business as usual, and the changes are likely to be lasting, even if energy prices retreat.

"The weakness in the United States economy in housing, that we have read about for over a year, with the mortgage crisis and credit crunch, was one blow. But oil is another blow, and it's probably one blow too many," Dow Chemical Chief Executive Andrew Liveris told Reuters.

The consumer response has been modest so far, but the pattern is clear.

The number of miles traveled on U.S. roads fell 4.3 percent in March from a year earlier, the U.S. Department of Transportation said Friday, the sharpest yearly drop on record and the first decline in the month of March since 1979, when the last major oil shock hit drivers.

Sales of gasoline-guzzling sport-utility vehicles have plummeted.

The prices for used SUVs dropped by 17.5 percent year-over-year in April, according to Manheim Consulting, which tracks used vehicle sales. Compact cars were up 2 percent.

Businesses are reacting even more dramatically.

"Going green" with energy efficiency programs, once a popular image-burnishing exercise, have now become a matter of survival for oil-intensive companies.

Gerard Arpey, CEO of American Airlines parent AMR Corp , said earlier this week the industry "will not and cannot continue in its current state" as he unveiled plans to cut thousands of jobs, retire old aircraft and charge passengers to check bags.

Automaker Ford Motor announced production cuts Thursday and said it no longer expected to return to profitability next year.

"We saw a real change in the industry demand for pickup trucks and SUVs in the first two weeks of May," Ford Chief Executive Alan Mulally said Thursday.

"It seemed to us that we reached a tipping point where customers began shifting away from these vehicles at an accelerated rate." Gasoline prices hit a record national average of $3.79 a gallon in the run-up to the Memorial Day holiday weekend, traditionally the start of the summer driving season.

This year, 12 percent of drivers say they have canceled travel plans and another 11 percent have cut the distance of their trips because of expensive fuel, according to a survey by Deloitte & Touche.

James Hamilton, an economics professor at University of California, San Diego, who studies oil price shocks, said consumers had shrugged off steep rises in gasoline prices for most of this decade because even at higher prices, it still represented a modest portion of household budgets.

Now, with wages stagnating and fuel prices rising more rapidly, consumers can no longer absorb the pressures.

That is reflected in slumping consumer confidence and a steep drop in spending on non-essentials.

"We're back at a level of (fuel) expenditures that's similar to what we had in the late 1970s," Hamilton said.

"It's a big enough part of people's budgets that it's definitely getting their attention." Hamilton sees the beginnings of permanent changes in consumer behavior.

Even if gasoline prices moderate from current levels, consumers are shunning SUVs, he said.

Trips to suburban strip malls are becoming less popular as Americans balk at driving an extra 10 or 15 miles just to save a dollar or two at a national chain store.

The economic implications are huge.

Consumer spending accounts for some two-thirds of U.S. economic activity, and there is no denying the slowdown.

The Commerce Department's retail sales data shows demand down sharply for autos and furniture, as well as at department stores.

The retail category showing the sharpest gain is gasoline stations, evidence of the higher prices. When consumers curb spending, companies retrench, manufacturing falters, and employment dips.

That is precisely what is happening now, and it points to a dangerous slowdown in the U.S. economy already grappling with the worst housing slide since the Great Depression.

"When gas prices hit $4 a gallon, you're going to see America come to a screeching halt because for two weeks, consumers aren't going to shop for anything except groceries," said Britt Beemer, head of America's Research Group, which surveys consumers on spending behavior.

"Consumers are trying to figure out how they're going to manage the family budget when it costs $70, $80, $90 to fill up the tank of gas," he said.

Beemer's polls have found that a growing number of consumers are writing shopping lists before heading to the stores so that they won't be tempted to pick up impulse buys.

The number of consumers putting off a purchase of $500 or more has been growing since October. When he asks why they are not spending, the most common answers are high gas prices, or lack of money.

Back in October, consumers were more likely to say that they couldn't find what they were looking for in the stores.

"Now, they're not even going to the stores. They're making the decision not to shop before they even leave their homes," Beemer said.

Copyright 2009 Reuters. Click for restrictions.