Gasoline is spiking to $4 a gallon and above in some parts of the U.S., but the worst of the price shock could be over—unless oil production is threatened beyond Libya.
Experts say sufficient supply and diminishing demand — as prices rise — should soon put a lid on prices. But the question is how long prices remain high and how much psychological — and potential economic — impact there has been from the sudden increase. Gasoline in the past week was at a national average of $3.52 a gallon, up $0.33 in just two weeks.
Measuring how much the consumer psyche can handle, or at which level oil would have to reach before businesses hunker down, is also not easy, since the economic backdrop is different this time. Even with high unemployment and the pain of the credit crisis a not-too-distant memory, the economy is exiting recession, not entering it.
The last time oil crossed $100, reaching the $140s in the summer of 2008, the economy was struggling with the unfolding financial crisis, and the failure of Lehman Brothers still on the horizon.
"The economy is a lot healthier now than it was three years ago, so I don't think the effects are going to be long lasting. What concerns me is the non linear ... for argument's sake, consumers get worried for whatever reason and consumer confidence weakens significantly. That's the series we're going to be watching over the next few weeks. If that happens, maybe we get an impact from oil at much lower levels," said Deutsche Bankchief U.S. economist Joseph LaVorgna.
Economists are also watching retail sales this Friday to see if there was any impact in the February number.
LaVorgna said the level he expects oil to make a dent in the economy is about $120 a barrel. Oil was trading at $104.85 per barrel Tuesday, and has been rising and falling with every turn of events in Libya and elsewhere in the Middle East.
RBC, in a poll reported first by CNBC, asked consumers several weeks ago about the impact of gasoline prices on discretionary spending habits and the ability to afford driving. Thirty-two percent said they were already impacted. Another 18 percent said they would be impacted when gasoline reached $3.25 to $3.75 per gallon — its current level. Another 26 percent said they would be affected by gasoline at $4 to $4.50.
More evidence of consumer pain at the pump may be what drove the IBD/TIPP economic optimism index to 43 in March, from 50.9 in February. The index, reported Tuesday, is now 3.7 below its 12-month average of 46.6. The primary reason was said to uncertainty in the Middle East. Consumers were also asked about the prospects for the economy the next six months, and that reading suffered the most, dropping 25 percent to 39.7.
MasterCard Advisors' SpendingPulse on Tuesday reported that retail gasoline demand fell 1.8 percent last week. Demand was down 1 percent year-over-year, but it was up 1.6 percent for the last four weeks compared to last year.
This reaction from consumers, and the idea that they will cut back as gasoline prices pinch, supports the idea that gasoline may not have that much further to go without more major supply disruptions.
Diesel fuel, which has a more immediate impact on business than on consumers, is also rising. The national average jumped $0.15 to $3.87 a gallon for the past week, and is already above $4 in a number of states.
Aaron Wasserman is president of Atomic Transportation, a small third-party logistics firm in the Midwest that matches freight with carriers. He says diesel fuel increases are being passed along and are already making an impact.
"Freight that was moving for 90 cents a mile could be moving now for as much as $1.10 a mile," he said, explaining that the price can be applied to anywhere from 40,000 to 44,000 pounds per truck. "It makes it difficult when you have rates in place and things like this happen," he said.
"Fuel surcharges start adding up," he said. "Produce is about to start shipping over the next couple of weeks out of Florida, which should make everything very difficult."
Gasoline Price Peak?
Tom Kloza, chief oil analyst at OPIS, said he expects gasoline at the pump to top out at a national average at about $3.75, but he acknowledges the momentum in the oil market could send it higher. However, without further Middle East disruption, he does not anticipate it will go sharply higher.
"We're going to somewhere between $3.65 and $3.70, given where the futures prices are," said Andy Lipow, president of Lipow Oil Associates.
"There's some good news in all of this. We have had a supply disruption out of Libya. It's taken oil off the market. I guess one of the things that is going to dampen some of the prices rises at least is that in the second quarter, world oil demand is at its weakest point. We come out of the heavy demand winter season and go into a lighter demand season worldwide."
Kloza said drivers are so far out about $50 a month from higher gasoline prices, and the poor are impacted disproportionately.
"In the Northeast, the incomes are higher and it doesn't have the impact. Look at some places like rural Mississippi and Alabama, where we've probably reached 15 percent of their discretionary incomes ... It's very irregular.
"When you get into places where there's particularly high unemployment, it has a bigger impact. If you are in California, where the prices are higher and the economy is a little more fragile, people will tell you they cut back," he said.
Besides the pinch from higher oil prices, California consumers can pay as much as $0.72 a gallon in taxes and fees, Kloza said.
Lipow said the biggest impact to consumers, however, is outside the U.S. in places where rising food prices are also a factor.
"They see the effect virtually immediately. One of the factors is number one, not only has oil supply currently been disrupted, but you could see all of the Libyan oil production shut in. As that goes on for a longer period of time that affects light sweet crude oil supply, as opposed to what Saudis can add to the market, which is heavier crude," he said.
Lipow said the refineries in Europe were the major recipients of Libyan oil. But its absence also affects East Coast refiners, which means U.S. East Coast gasoline prices would be higher than some other regions, aside form California.
"One of the beneficiaries could be the (U.S.) Gulf refining industry which could process the additional crude oil Saudis are putting on the market and export it back to Europe. We're actually in the midst of the turnaround season right now.
"As we speak, the refineries on the Gulf Coast, Midwest and East Coast are doing maintenance which was planned long before these events occurred ... that'll be over in the next couple of weeks," Lipow said. "When we see the maintenance end, we'll see a significant amount of refining capacity returning to service by the end of March."
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