Fuel and Economy the Price of Fuel

Fuel and Economy

The price of fuel affects every citizen in one way or another, thus, it can have profound consequences on not only the United States, but the global economy as a whole.

On April 28, 2005, President George W. Bush expressed concern about the economy due to higher energy prices, and stressed the need to take measure to boost oil output and lower prices (Bush pp). In a primetime press conference, Bush said the small business owners and families are paying higher prices at the gas pump, and that higher gas prices is like a tax and "I do think it's affected the economy" (Bush pp). His comments followed a report that same day from the Commerce Department that stated that the United States "economy grew at an annualized 3.1% in the first quarter in terms of real gross domestic product, decelerating from the previous quarter's 3.8% and marking the lowest growth in eight quarters" (Bush pp).

The day before, on April 27, 2005, it was announced that record prices for jet fuel was playing havoc with U.S. airlines, resulting in American, Delta, Continental and Northwest reporting steeper first-quarter losses than a year earlier (Maynard pp). The industry blamed jet fuel prices, the airlines' biggest operating expense, for the decline (Maynard pp). In March, a gallon of jet fuel averaged $1.59, far above the level of $1.25 that companies had forecasted for this year (Maynard pp). Some airlines bought hedging contract to lock in the lower price, "meaning they are bearing the full brunt of higher prices, and as a result, company officials and industry analysts say the "pain will be widespread' (Maynard pp). Gary Kelly, chief executive at Southwest Airlines, one of the few that protected itself against higher fuel prices, says that rising prices "put the whole industry's future in question" (Maynard pp). Even Philip Baggaley, an industry analyst at Standard & Poor's said, "I guess the best description is grim," and companies that are already in bankruptcy proceedings, such as United, U.S. Airways, and ATA, "could be mired there even longer than they have predicted" (Maynard pp). More companies could topple, especially Delta, Northwest, and Independence Air, whose finances are believed to be among the most precarious among the solvent airlines (Maynard pp). Employees are have forced to accept deep wage and benefit cuts across the industry, and may even see more compensation slip away, as well as jobs (Maynard pp). Passengers have been watching the fares go up and may be paying even more for tickets during the busy spring and summer travel seasons, and may see service disappear on certain unprofitable routes (Maynard pp).

Although fuel prices spiked last year as well, most executives was caught by surprise, "because they were eager to believe predictions that oil prices would drop once the major conflict in Iraq subsided," (Maynard pp). Analysts, this time last year, projected that oil would sell for $24 to $25 a barrel in 2005, half of what the prices have averaged this year (Maynard pp). Baggaley said Delta, which had about $1 billion less in cash on hand this year than a year ago, could face a liquidity crisis by the end of the year if fuel prices do not fall, but few in the industry expect much relief (Maynard pp). Says Baggaley, "I think there is a real worry that they are running out of places to cut costs ... Some of the airlines could run out of cash and see no alternative but bankruptcy" (Maynard pp).

The airlines industry is not the only transportation industry affected by fuel prices, truckers are feeling the pain as well (Schoenberger pp). With oil prices hovering at record levels, the cost of diesel fuel is sky-high, and is an added cost that independent truckers, such as Hector Diaz, cannot pass on to his customers and still compete in the world of local trucking (Schoenberger pp). Fuel accounts for approximately 37% of his total costs, leading him to selling one of his two trucks last year just to stay afloat due to the dramatically climbing diesel prices (Schoenberger pp).

The price of oil hit a historic high the second week in April 2005 at $58 a barrel, and is having a profound impact on many areas of economy (Schoenberger pp). "Workers who commute long distances for low-wage service jobs are bleeding every mile," and that has many, such as the Silicon Valley leaders worrying that the extra money people spend on gas takes away from the sale of consumer products, and economists fret about inflation (Schoenberger pp).

According to Brad Sorensen, an energy analyst at Charles Schwab, "oil prices will soon push up the costs of a broad range of consumer goods ... It will cost more to produce the goods, and more to transport them ... sooner or later they'll pass the costs to the consumer" (Schoenberger pp). And express mail services have been forced to add surcharges to offset the price of jet fuel (Schoenberger pp). UPS spokeswoman, Susan Rosenberg, says the impact of rising oil prices is not an isolated U.S. issue and may impact global trade (Schoenberger pp). John Greenagel of the Semiconductor Industry Association, says according to a recent report, "the average American household lost $749 in discretionary income because of rising gas prices from January 2004 to March 2005," and that translates into $24 billion in lost electronic sales and nearly $5 billion in lost semiconductor sales (Schoenberger pp). Moreover, because petroleum is the key ingredient in plastic, that industry has been hit hard as well (Block pp). Energy prices not only affect the products that are made with oil, but everything that is trucked, shipped, or flown (Block pp). Goods have to get to market, people to get to retail centers, and tourists have to travel, the cost of oil affects the price of every commodity on the store shelves (Emerson pp).

Federal Reserve Chairman Alan Greenspan and other economists are concerned that higher energy prices could spark inflation and sap economic growth (Schoenberger pp). The Zambian Energy and Water Development Minister, George Mpombo, said that the Zambian government agrees with the International Monetary Fund that escalating oil prices are stifling developing economies, especially African economies like Zambia (Zambian pp).

The first week in April 1005, The Energy Department projected that the high gasoline prices and $50-plus crude oil to last at least through next year as producers struggle to keep up with demand (Hebert pp). The department said it expects gasoline prices to average $2.35 a gallon nationwide by May, just in time for the heavy summer driving season (Hebert pp). During the first week in April, motorists were paying an average of $2.22 a gallon, 44 cents more than a year ago (Hebert pp).

In places such as New York City, the Iraq war's ripple effects have completely changed the way they do business (Marshall pp). Says one business owner, "A driver who was able to make 15 deliveries day is now making 12 or less," a loss directly attributed to the additional security (Marshall pp). And as the price of oil continues to rise, largely due to the ongoing violence in Iraq, many industries are forced to pass the costs on to clients as a fuel surcharge" (Marshall pp). In fact, aside from defense manufacturers or suppliers, there are few businesses that have benefited from the Iraq war (Marshall pp).