The Spillover Effect Of $100 Oil

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U.S. consumers are hurting. Amid the housing crisis, a weakening job market, and spiraling inflation, consumers are facing the toughest economic climate in more than 15 years. With crude oil prices hitting the once-unthinkable $100 milestone on Jan. 2 and now hovering in the mid-$90s, overall conditions aren't likely to be helped by a modest easing in crude prices.



That's because high oil prices have an inflationary effect throughout the economy. "When the price of oil goes up, it impacts virtually every commodity, good, and service we purchase," says Terry Clower, associate director for the University of North Texas' Center for Economic Development & Research. "Everything from milk to gasoline to a bucket of fried chicken will cost more. It's a potentially scary scenario."



Energy costs don't exert the same bite on Americans' budgets as they did in the late 1970s and '80s. But with oil prices nearly doubling in the past year, the cost of powering an economy that relies on a total of 22 million barrels per day has risen sharply. The Consumer Price Index increased 0.8% in November, its largest advance since September, 2005. Higher energy prices accounted for nearly 70% of that increase. Economists say that because Americans spend a lower proportion of their incomes on energy than 25 years ago, rising oil itself can't cause a recession. But with weakness in the job market, capital spending moderating, and the housing market in a full-blown crisis, the economy has reached a danger zone.



Airlines Boosting Fares

"The economy is getting death by 1,000 cuts," says Lester Lave, professor of economics at Carnegie Mellon's Tepper School of Business. "One-hundred-dollar oil alone won't cause a recession, but it could break the camel's back." A growing chorus of analysts agrees. "One-hundred-dollar oil could be the swing element," says David Wyss, chief economist at Standard & Poor's. [S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).] "If prices remain at this level, a recession in the first half of 2008 is likely. [But] most Americans feel a recession is already here."



The way most consumers experience higher oil prices is at the gas pump. The average price of a gallon of gasoline on Jan. 11 was $3.10 per gallon, up 38% from $2.28 a year ago, according to the Oil Price Information Service's AAA Daily Fuel Gauge Report.



Another direct impact is the cost of your weekend jaunt to Florida. U.S. airlines have boosted ticket prices at least seven times since September to combat rising jet-fuel prices, which jumped nearly 60% in the past year. Every dollar increase in the price of a barrel of crude oil drives approximately $465 million in annual fuel expenses for U.S. airlines, according to the Air Transport Assn., an airline trade group. Since jet fuel represents about a third of airlines' operating costs, domestic fares began rising $10-$20 or more within days of oil prices reaching $100 per barrel. "With increasing speculation about a slowdown in the economy, $100 oil will put pressure on carriers to generate additional revenues or find ways to cut costs to remain whole," says ATA Chief Economist John Heimlich.



Diaper Prices on the Rise

More surprising price rises will hit products with oil or oil derivatives as a main ingredient. Procter & Gamble (PG) hiked prices on a variety of products in 2007 to make up for the rising costs of the oil-based chemicals in cleaning products. It raised prices of fabric softeners like Downy by 9% in the fall and, in January, will impose an average 8% increase on Olay and Ivory personal cleansing products. "We will continue to take the necessary pricing actions to recover rising commodity and energy costs," Robyn Schroeder, a Procter & Gamble spokesperson, wrote in an e-mail message.



Other consumer-products companies are doing the same. Effective Feb. 3, Kimberly-Clark (KMB) plans to increase prices for consumer tissue and baby-care products like Huggies Diapers by 4% to 7%. The company uses oil-based raw materials like polypropylene and pulp for these products, and is facing higher overall production costs. Oil is also a chief ingredient in the rubber used to make tires, and prices for tires have been rising in tandem with oil prices. Cooper Tire & Rubber (CTB) raised tire prices 5% in June, 2007, and another 4% in October, and Bridgestone Firestone North American Tire hiked prices in October. More price rises are expected if oil prices continue to surge.



The impact of expensive oil is less direct for some items. The price of a gallon of milk has risen nearly 30% over the past year, according to the Bureau of Labor Statistics. One reason is that as more corn streams toward ethanol production, the price of the grain feed for cows has spiked, and milk prices followed suit. Since farmers' equipment is fueled with diesel and milk requires transportation, there's still more inflationary pressure on milk. The rise of transportation costs affects goods in varying degrees, economists say. The cost of low-value, high-volume goods like fruits and vegetables and cut flowers will rise faster than high-value goods because transport makes up a greater proportion of the price.



Even Concert Tickets?

Retailers are passing these costs on to consumers. Kroger (KR), the biggest U.S. grocery chain, charged shoppers more to recoup higher costs for items like cereal and cheese as well as the cost of transporting them in the third quarter of 2007. Kraft Foods (KFT), General Mills (GIS), and Colgate-Palmolive (CL) have all raised the price of grocery and food products, citing higher costs like transportation fuels and plastic packaging.



Among the less obvious venues affected by pricey crude: movie and concert tickets. Say what? Yep, those acres of stadium-style-seating arenas cost plenty to heat and cool. Admission prices to movies, theaters, concerts, and sporting events were up 0.6% in 2007, according to the Bureau of Labor Statistics. Wyss, S&P's chief economist, says with heating oil prices up more than 30% this year, moviegoers in northern climes may pay even more this winter. "Rising energy prices affect theater owners just as they do any other business or consumer," says Patrick Corcoran, a spokesperson for the National Association of Theater Owners. Will that mean higher ticket prices? "There's certainly potential," he says.