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Consumer Shock at the Pump

by Alexander Jung Wednesday, Oct. 19, 2005 at 9:44 AM

Life was disrupted when the world faced the first oil price crisis in the winter of 1973. People in the southern US are experiencing this today.. Around a quarter of US production was lost through the hurricane.


Gas Prices Skyrocket after the Hurricane. Does “Katrina” Endanger the Worldwide Upswing?

By Alexander Jung

[The Gulf of Mexico is important for the American oil industry: 30% of oil production, 50% of US refineries and over 60% of all crude oil imports come through the Gulf of Mexico. This article is translated from the German in: DER SPIEGEL 36/2005.]

The pictures bring back memories. Cars line up behind cars at the filling stations. Each customer receives only a few apportioned gallons of gas. The price shot up like a rocket within days.

Life was disrupted when the world faced the first oil price crisis in the winter of 1973. People in the southern US are experiencing this today. Gasoline and diesel oil are scarce and expensive. The oil giant Chevron is rationing fuel to its wholesalers. Gas costs 60 cents per gallon (3.8 liters) more than only a day before.

In the middle of the 1970s, the price shock triggered by the states at the Persian Gulf paralyzed the global economy. Economists spoke of “stagflation” to describe the plight, stagnating growth with increasing inflation. Does a similar crisis now threaten the world through the catastrophe at the Gulf of Mexico?

Well-informed experts like the US oil historian Daniel Yergin regard the situation as very serious. This could possibly become “the greatest energy shock since the seventies,” the Pulitzer Prize winner said. His pessimism is based on the fact that the force of nature hit production facilities and refineries.

The shortage in the refining plants forces up the price for fuel so exorbitantly that it even uncoupled last week from the price of oil. Around a quarter of US production was lost through the hurricane. No one knows how long it will take until all the facilities, especially the pipelines, are running smoothly again.

The damages as disastrous as they are will hardly derail the economy. Louisiana and Mississippi are structurally weak regions representing less than two percent of the American gross domestic product…What matters much more for businesses is the uncertainty about consumer conduct.

After this shock at the pump, feverish American consumers could gradually ask themselves whether or not they must limit themselves somewhere.

However if moderation became a virtue again, this would have serious consequences for a national economy entirely oriented on heavily indebted consumers spending more than they have. The savings rate is at minus 0.6 percent.

The correction of the latest annual forecast of Wal-Mart, the largest worldwide business, alarms consumer researchers. Corporate head Lee Scott made the price of gasoline responsible that their goals were not reached. American retailers have seldom looked forward so anxiously to Christmas business.

In the second quarter, the whole economy grew more weakly than expected. Important indicators like the sales index for the Chicago region registered an unparalleled slump in August 2005. This slump reflects the deep crisis in the US auto industry.

The warning of the Federal Reserve Bank Alan Greenspan that consumers may not rely on the continued increased value of their homes has underscored the fragility of the basis of the long robust US economy. Stephen Roach, the skeptical analyst of the Morgan Stanley investment bank, sees the economic superpower at a “turning point”.

In Germany, economists are also beginning to revise their economic forecasts. The shopping mood of consumers has been visibly depressed for years; real wages have stagnated for a long time. Purchasing power declines.

A normal household spends 128 Euros more for fuel than a year ago, the Institute of the German Economy estimates. Car drivers pay gnashing their teeth or – and this is new – leave their vehicles at home. “The risk that private consumption will stagnate in the second half of the year is considerable,” says Deutsche Bank economist Stefan Biehmeier.

Nevertheless most economists guard themselves from drawing parallels to the price shocks of the past. Inflation seems under control today. Thanks to economical motors and boilers and better heat installations in industrials states, energy as a cost-factor does not play a significant role any more. Ten percent of household income in Germany is spent on gasoline, gas and heating oil.

The high price of oil is a sign that the energy hunger in China is not slackening. China’s economy is expanding. This is far more important than the financial sacrifice that the citizens make at the gas station.

“Everything is not as dramatic as in the seventies or eighties,” Dennis Snower, head of the Kiel Institute for the World Economy, tries to put us to rest.

Throwing parts of strategic reserves on the market, as German chancellor Gerhard Schroeder announced on Friday, is wasted effort. This step may not have a permanent influence on the price. Gasoline, diesel and heating oil are lacking more than oil. The increase in the spot-market prices in Rotterdam of around 28 percent in merely two weeks shows how coveted are refined oil products. Crude oil is only 2 percent more expensive.

Rather the government by touching the oil reserves made this psychologically important buffer into the last trump – and gave the markets a signal that forces up the price.

Some experts look forward to times of falling oil prices. Holger Schmieding, London chief economist of the Bank of America, regards the current bull market as exaggerated and expects a level of 50 dollars per barrel (159 liters) by the end of 2005 that will fall to 40 dollars by Easter. “That would be a justified price.”

This optimistic scenario does not change the fact that the current oil price shock will affect the German economy. The hurricane disaster delays the economy stimulation. “The oil price will prevent our upswing this year.”

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