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Gas Prices A Threat to Family Budget

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THE PROGRESSIVE REVIEW - February 28, 2008
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Gas Prices Soar, Posing a Threat to Family Budget
By Jad Mouawad
The New York Times

Gasoline prices, which for months lagged behind the big 
run-up in the price of oil, are suddenly rising quickly, 
with some experts saying they could approach $4 a gallon 
by spring. Diesel is hitting new records daily, and oil 
settled at a record high of $100.88 a barrel on Tuesday. 

The increases could not come at a worse time for the 
economy. With growth slowing, energy increases that were 
once easily absorbed by consumers are now more likely to 
act as a drag on household budgets, leaving people with 
less money to spend elsewhere. These costs could worsen 
the nation's economic woes, piling a fresh energy shock 
on top of the turmoil in credit and housing. 

"The effect of high oil prices today could be the 
difference between having a recession and not having a 
recession," said Kenneth S. Rogoff, a Harvard economist. 

The depth of the nation's economic problems became clearer 
Tuesday with the release of figures showing that prices at 
the producer level rose 1 percent in January from December, 
driven in large measure by energy costs. Compared with a 
year ago, prices were up 7.4 percent, the worst producer 
price inflation in the United States since 1981. 

Other new figures showed that home prices around the 
country are falling at an accelerating pace, suggesting 
no end is in sight for the housing slump. 

As of Tuesday, regular gasoline was selling at a nationwide 
average of $3.14 a gallon, according to AAA, the automobile 
club, up from $2.35 a year ago. The price has jumped 19 
cents a gallon in two weeks. 

Energy specialists predict that, as demand picks up further 
this spring and summer, retail prices will surpass the high 
of $3.23 a gallon set last Memorial Day weekend. That high 
fell short of the inflation-adjusted record of $3.40 in 
today's money that was set in 1981. 

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On Tuesday, diesel prices rose to a record $3.60 a gallon, 
compared with $2.62 a gallon last year. 

For a decade, rising oil prices failed to dent global 
economic growth. In the United States, consumers absorbed 
the higher costs because of easy credit and rising 
prosperity, while in developing countries, government 
subsidies helped ease the pain. The rise in energy prices 
was a result of growing demand around the world. 

The price of oil has quadrupled in six years, and the close 
Tuesday was not far below the inflation-adjusted high set 
in April 1980, after the Iranian revolution. That record, 
$39.50 a barrel, equals $103.76 in today’s money. 

As oil prices spiked last fall, low wintertime gasoline 
demand helped keep prices in check. But now, experts say, 
the price of oil is finally showing up at the pump. 

For ordinary Americans like Phyllis Berry, a 31-year-old 
factory worker for General Motors in Cleveland, gasoline 
costs are starting to hurt. 

"I used to fill it up pretty regularly, but now I drive it 
until the tank is almost empty, looking for the cheapest 
place to buy gas," said Ms. Berry, who drives a beat-up 
Dodge Caravan. 

She said that she used to take her four children to the 
movies four or five times a month. But with the cost of 
gas, tickets, popcorn and soda adding up to $70, they now 
go only once a month. 

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Still, things are not quite as bad as during the 1970s and 
1980s oil shocks. In the early 1980s, at the height of the 
last energy crisis, energy accounted for about 8 percent 
of household spending. As prices fell and the economy 
became less energy-intensive, energy costs fell under 
4 percent of household spending in the early 1990s. 

With the run-up in prices in recent years, economists say 
energy's share of disposable income is slowly creeping up 
again. In December, that figure reached 6.1 percent, the 
highest level since 1985. The increase of two percentage 
points — amounting to $200 billion — is a huge sum, a 
little less than half what Americans spend each year on 
new cars and automobile parts. 

"You're adding an oil shock on top of a crunch on credit 
and a housing collapse," said Nigel Gault, an economist at 
Global Insight. "Even the U.S. economy cannot withstand 
all of that at the same time." 

American consumers have responded belatedly by cutting back 
on their energy use. Oil demand in the United States grew 
by just 0.4 percent in 2007 and is expected to be flat in 
2008. 

But global oil demand, the relentless driver behind higher 
prices, is still expected to increase by 1.4 million 
barrels a day this year, analysts estimate. That growth, 
from China and the Middle East, may help keep prices up, 
whatever happens to the American economy. 

According to the latest forecast by the Energy Department, 
gasoline prices should peak near $3.40 a gallon this spring.

But many analysts consider the government's forecast 
conservative, foreseeing a sharper spike as refiners 
come out of the seasonal maintenance period and start 
producing summer-grade gasoline in March and April. 

"We've gone this high without the normal summer dynamics," 
said Tom Kloza, publisher and chief oil analyst at the Oil 
Price Information Service. "That's when I think we will 
have the big jump — of 50 cents to 75 cents a gallon." 

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Mr. Kloza said he expected gasoline to peak around $3.50 
to $3.75 a gallon nationwide. Geoff Sundstrom, AAA's 
spokesman, echoed that view and added that gas at $4 a 
gallon is possible this summer. "We’ve gone from a worry-
ing situation for gasoline to one that is quite alarming," 
Mr. Sundstrom said. 

Oil prices are unlikely to drop anytime soon, analysts 
said. Barclays Capital recently increased its long-term 
prediction, saying prices could reach $137 a barrel in 
2015, up from a previous target of $93 a barrel. 

"The remorseless move up in long-run prices has not yet 
fully played out," Barclays analysts said in a note to 
investors. 

While demand keeps growing, producers are struggling to 
catch up. They are not replacing the oil they are pumping 
out of the ground fast enough because of restrictions on 
access to fields, as well as rising costs. Meanwhile, 
demand in China, India and the Middle East is expected to 
push oil consumption up by more than one million barrels 
a day, each year, for the next decade. 

"An oil crisis is coming in the next 10 years," John B. 
Hess, the chairman of the Hess Corporation, said at a 
recent conference held by Cambridge Energy Research 
Associates. "It's not a matter of demand. It's not a 
matter of supplies. It's both." 

----------

Christopher Maag contributed reporting from Cleveland. 

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