Rising oil prices are emerging once again as a threat to the U.S. economic recovery just as it appears to be gaining momentum.
Oil prices have climbed sharply in recent weeks as mounting tension with Iran has raised the threat of a disruption in global supplies. On Wednesday, oil futures on the New York Mercantile Exchange rose $1.06 to $101.80 a barrel on reports that Iran had cut off sales to six European countries in response to the European Union’s newly stepped-up sanctions. Iran’s oil ministry later denied the report.
Higher gas prices force consumers to cut back on other spending.
Pricier oil comes at a delicate time. The job market has begun showing signs of life, and other economic indicators are pointing toward stronger growth. But the recovery remains too halting to easily absorb the shock of sharply costlier oil
Higher crude prices are likely to translate into higher prices at the gas pump, where drivers already are paying more to fill up. The average price of a gallon of regular gasoline has jumped 13.1 cents to $3.518 in the past month, according to auto club AAA. Some parts of the country have seen even bigger increases, with prices approaching $4 a gallon in parts of California
Oil prices affect virtually every aspect of the U.S. economy. Higher prices at the pump force consumers to cut back spending on discretionary items like restaurant meals, haircuts and family vacations, hurting those industries.
Manufacturers face lower profit margins as they pay more to get their products to market and face higher costs for plastics and other petroleum-based materials. A prolonged increase can drive up inflation and drive down hiring.
“It has the power to derail an economic recovery that’s not looking very strong already," said Paul Dales, an economist for research firm Capital Economics
Higher oil prices tend to show up first in consumer spending. Americans spend less than 5% of their disposable income on gas, but because most families can’t easily cut back on driving, at least in the short term, higher gas prices usually result in lower spending in other areas. Moreover, because gas prices are so public, they have an outsize impact on consumer confidence, said Chris Christopher, an economist with IHS Global Insight.
“The average American can’t say to their boss, ‘Hey I need to be paid more because it costs more to get to work,’ " Mr. Christopher said.
Already, there are signs consumers are growing wary of higher gas prices. A preliminary reading of February consumer sentiment from University of Michigan last week showed an unexpected drop in confidence that many analysts attributed to higher gasoline prices.
Some economists fear a repeat of last year, when the economy appeared to be gaining strength only to stall when oil prices spiked because of turmoil in Libya.
Gasoline prices are still well below the level they reached last May, when they briefly
Oil-based products make up a majority of the dozens of raw materials that go into the models made by Goodyear Tire & Rubber Co. In its fourth-quarter earnings release Tuesday, the Akron, Ohio-based company said the steady upward march of oil and other prices raised overall raw material costs about 30%, or $2 billion, in 2011 over 2010. In the U.S. and most other parts of the world, the company was able to offset that pressure with price increases and by introducing costlier models.
Robert Gross wasn’t so lucky. Mr. Gross is chief executive of Monro Muffler Brake Inc., a Rochester, N.Y.-based chain of muffler and automotive repair stores that generates 40% of sales from tires. With consumers hurting from paltry income growth and high unemployment, Mr. Gross’s company has had a hard time passing along increases. Higher oil and tire costs were the main reason margins for the third quarter ended Dec. 24 shrank to 38.4% from 39.1%.
“They’re shocked at how expensive tires are. If people need something else they buy the something else first," he said.
Other businesses have already shifted their operations in an effort to insulate themselves from rising energy costs.
Forever Preserved, an Encinitas, Calif., maker of preserved plants and palm trees displayed in offices, malls and other enclosed areas, can ill afford higher fuel prices, said owner Ronald Pecoff. Mr. Pecoff sold off four commercial vehicles that he and his employees used to make thrice-weekly trips transporting harvested palm tree leaves between his production facility in Encinitas and their tree farm 90 miles east in Borrego Springs. He now has a contractor make less frequent trips, leaving the company with fewer workers, lower insurance costs and no need to pay mechanics for wear and tear.
“I’ve minimized all my exposure to transportation as much as possible," he says.
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