Linear, Uni-Variate, Static Economic Analysis Misleads Energy Priorities

Ed: Found this article from 2005. Good example of linear, uni-variate, static economic analysis that encouraged SUV purchase, and increased travel. How is the global demand relevant when the USA consumes more oil than the next 20 countries - including the 1.4 billion people in China?

from the March 29, 2005 edition

Oil prices spread to grapes, TVs, pizza

By Alexandra Marks and Robert Tuttle 

NEW YORK – Christie Baker, owner of Flowers on the Green, recently had to hike the cost of a delivery in Guilford, Conn., from $6 to $8 to make up for the higher cost of gas. In La Jolla, Calif., Domino's just increased the amount it pays delivery drivers by a nickel a trip: They now get 95 cents to transport a large pepperoni, but it's still not enough to cover the cost, says assistant manager Donald Cunningham. And at Meyers Moving & Storage in New York City, they're now charging $15 more an hour to move from an apartment on the East Side to the West. Owner Guy Drori says the rates may go up again come summer.

The hike in oil prices is beginning to ripple through the economy, pinching consumers at places far beyond the gas pump.

During the past year, the robust economy absorbed much of the increase in energy costs. Competition for consumers helped, and kept many businesses from passing along the spike in fuel costs. But with gas prices hovering around new record highs, and the cost of diesel keeping pace, many businesses are finding they can no longer absorb the increased costs. That was reflected last Tuesday in the Producer Price Index, which rose 0.4 percent in February.

And though prices have eased in recent days, they remain well above $50 a barrel, and many expect them to stay high. So air travelers on international routes are now seeing huge fuel surcharges, the cost of a bunch of grapes is up a few cents, and economists expect to see costs increase on an array of manufactured goods from televisions to toasters.

"The true cost of energy is now being felt more broadly through the entire economy," says Mark Routt, a senior consultant at Energy Security Analysis, Inc., in Wakefield, Mass.

The reason, according to Mr. Routt, is what he calls the "tale of two economies." Most consumers focus on gas prices and the impact on their wallets. But diesel, which fuels truckers and some manufacturers, has gone up just as fast, and in some cases, gone higher. Thanks to that competition for consumers, combined with the concurrent growth of cheap imports, most people have so far been sheltered from that impact.

"I can still go online and I can order a TV set or a pair of pliers or some other gadget and still get free shipping, if I'm careful," says Mr. Routt. "That, however, can't last forever."

Listen to the independent truckers, who've taken a major hit from the diesel-price hikes. The base prices charged by truckers were set when the price of gas was just $1.10 per gallon during the 1990s, according to Larry Daniel, president of America's Independent Truckers' Association. So truckers have been watching their incomes shrink. A decade ago, truckers spent roughly 17 cents per mile on fuel; today they pay 35 cents. While there is a surcharge that truckers can pass along to the shipper, Mr. Daniel said that often the charge is pocketed by a broker or not charged at all.

Eventually, he says, truckers are going to have to start passing those increases along.

FROM GDP TO SUVS

That said, many economists remain sanguine, contending that the impact of the higher oil costs on the overall economy won't be that great.

Last week the Federal Reserve said it believed that the impact of higher fuel costs had not "notably fed through to core consumer prices." While over the long term, they may shave a half point or more off the GDP, adjustments to the economy are expected to be gradual, according to Thorsten Fischer, a senior economist at economy.com.

Today's energy crisis - if it can be called a crisis - is very different from the one in the 1970s. This hike in prices is driven by increases in demand from a robust economy not just in the US, but around the world. In the 1970s, the economy was already struggling when oil prices spiked due to a lack of supply.

"I don't think there's too much reason to be concerned," says Mr. Fischer. "We're going to have a little bit of a cutback in consumption, but still strong growth."

Some families are already trying to save gas, combining trips to the supermarket, hardware store, and play dates, for instance, instead of taking each one individually. And some new car buyers are now shying away from the ubiquitous SUVs. Car dealerships are seeing backlogs on the lots, and so they're increasing the incentives to keep them moving. That hasn't stopped several temporary plant closings in Detroit.

Higher gas prices affect SUV and truck sales on several levels. "It reduces the amount of generally available disposable income for consumers, it decreases the resale values of SUVs because they are less fuel efficient, and it makes the current operating costs more expensive," says Steven Szakaly, an economist at the Center for Automotive Research in Ann Arbor, Mich...