Rise in Gas Ripples Through Economy

(June 13) - Americans could be celebrating the Fourth of July with $5-a-gallon gas, and the effects will ring out from sea to shining sea.

As consumers use more of their income to fill up their gas tanks, they'll have less to spend on discretionary items like new bathing suits to wear to the beach and jewelry to accessorize.

Instead of visiting theme parks and ballgames, they'll be more inclined to find fun things to do at home -- "stay-cation" has quickly embedded itself in the American lexicon -- and will cook burgers and hotdogs on the grill before heading out to a fancy restaurant.

These are just some of the behavioral changes economists and investment advisers are anticipating as the U.S. enters a new age of energy prices and inflation.

While economic data released Friday showed that core inflation remains stable even as gas prices soar, that's been of little comfort to many consumers.

"The consumer is petrified right now and they have every right to be," says Michael Kresh, president of M.D. Kresh Financial Services in Islandia, N.Y. "It's not just the gas prices going up and going up so rapidly. But in the last two months food prices are following at a very high clip. Your basic staples that you need are getting more expensive.

"It's clear that people are going to stay close at home this summer. That's going to be a ripple on the economy."

How far that ripple carries is a matter of debate.

Impact on the Economy

Some economists say energy prices are too small a part of GDP to have a major effect on the overall economy. But others caution that energy is too much a part of the workplace and everyday behavior to be ignored.

"We're talking about when a person at the end of the day has cashed their check and they go to fill their car. What's left?" says Deborah Hewitt, associate professor of economics. "It's important to take the broad view on this one. Energy drives the economy. Every firm out there has to use energy in some form to produce what they produce."

The automobile industry will face the most direct hit from the gasoline surge, Hewitt says, but she points out that numerous other areas also will face big changes.

Consumers will buy fewer discretionary items -- think designer clothes, smartphones, home improvement items, and a plethora of other things related to leisure and vacations. Hewitt also sees the tire industry hurting as people drive longer on their current tread. Vacation spots already are seeing a decline in reservations, and the battered airline industry also will see fewer passengers.

Longer range, Hewitt expects more people to begin to move out of the suburbs and into cities to save on travel costs and be closer to work. At the same time, she says unemployment could continue to grow as profits diminish at large industrial operations that use fossil fuels to power their plants.

But not all the news is doom and gloom. Hewitt says some industries actually will benefit from oil's shocking surge.

Capital equipment manufacturers, who make the components needed to build more mass transportation, will be in demand. Research and development firms looking into alternative energy sources and solutions to the high energy prices, along with battery manufacturers, also should do well.

Some urban real estate centers will grow, as could agriculture when people start demanding more products made closer to home because of cost reductions through transportation costs.

"This has been a shock to our system," Hewitt says. "It's one that most people believe is going to continue and it's going to take restructuring in some key industries in our economy to get over this."

Where Do We Go From Here?

Some questions to ponder: Will gas really get to $5 a gallon? Will it matter? What can be done if it does? AAA reported national gas prices at $4.066 a gallon for regular unleaded, up about 31 cents over just the past month.

There are few analysts who have much optimism for significantly lower prices, but there are possibilities: A recession would send prices lower, as would a policy switch in developing countries away from providing huge energy subsidies that keep prices artificially low.

There are some, though, who don't think the question is as important as it's played up.

Jerry Taylor, an economist at the libertarian Cato Institute, says high oil has some effect on consumer behavior but does not drive the economy as a whole.

"You'd actually find it difficult to find many economists who think energy price increases are capable of setting off inflation," Taylor says. "I don't think gasoline prices or oil prices are quite the macroeconomic threat that some people once thought."

Perhaps not, but they certainly have been the single biggest driver in the stock market for the past three months. As oil prices have gained stocks have retreated and vice versa. It has posed a dilemma for investors.

"In the short term I don't see any positive feeling here," Kresh says. "That doesn't mean I'm not buying. I still think the market has a higher probability of a decline now and more of a correction, and a recession is probable."

There continue to be a number of risks to the upside for oil, primarily geopolitical tensions and supply disruptions that could keep pushing gas prices into the stratosphere.

Sean Brodrick, an analyst with Weiss Research who writes and blogs on energy issues for online newsletter moneyandmarkets.com, says supply problems in the Gulf of Mexico could be especially troubling.

"The drop we're seeing in crude inventories build may be telling us that things are even worse in Mexico than the April numbers told us," Brodrick says. "Yeah, we could get to $5 gasoline by the Fourth of July."

He says that if the government continues not to act on the oil situation by implementing serious conservation measures, the problems will only get worse.

"Our government is acting as if this is not a crisis, that it's just a short-term temporary problem," he says. "No, it's a crisis and we have to deal with it."