Oil still costs too darn much. Crude has fallen more than 25 percent to below $110 per barrel from its all-time highs, and some economists even predict it could dip to $80 within months. But if $110 oil provides some relief for US consumers at the pump - and $80 promises even more - it's still too high given that they are already struggling with everything from rising food costs to tighter credit and sliding home values.
"American consumers have a lot more working against them right now than just expensive gas," said Peter Schiff, president of money manager Euro Pacific Capital. "The problem with trying to sell something to the American consumer at the moment is that they are flat broke."
"And the price of gas is still way above where it was a couple of years ago, so it's not like Americans are paying bargain prices right now," he added. Economists and analysts say the multiple problems facing US consumers mean that even if oil falls to $80, a healthy peak holiday season is unlikely for retailers like Best Buy Co Inc, Wal-Mart Stores Inc and Sears.
And it is just as unlikely that auto makers such as Ford Motor Co or airlines like AMR Corp's American will roll back dramatic changes to business plans made as oil sprinted to an all-time high of $147.27 on July 11.
Some economists warn that oil is falling in part due to the slowing global economy. This would be bad news for US exports, a major contributor to the 3.3 percent growth in US gross domestic product in the second quarter reported by the US Department of Commerce on August 28.
"This is a double-edged sword," said Donald Straszheim, vice chairman of Roth Capital Partners, who predicts oil will fall to $80 within six months. "The reason the price of oil is falling is not because there have been any major oil finds, but because there aren't enough consumers to sell to. "The markets are grasping at straws if they think the decline in oil prices will serve as a magic potion for the problems facing the banking sector and the economy," he added.
According to the US Energy Information Administration, average US retail gasoline prices fell more than 10 percent to $3.74 in the week of August 25 from a record high of just under $4.17 in the week of July 7. But that is still up more than 18 percent from the beginning of the year and nearly 34 percent above August 2007.
"Who would have thought a year ago that the prospect of oil at $100 would be celebrated?" said Diane Swonk, chief economist at Mesirow Financial. "That price still adds insult to injury for American consumers, even if it's less painful than it was." Swonk added that despite the recent decline in oil, she still predicts a fourth-quarter decline in consumer spending because of the other challenges facing ordinary Americans.
"The best we can hope for is that lower oil prices will mitigate that decline," she said. If oil on its way up forced consumers to budget and alter their habits, it also wrought dramatic change on some industries, in particular automakers and airlines.
Airlines responded to escalating costs with a combination of fuel-saving measures - such as switching off engines and having planes towed to gates - and capacity cuts. American Airlines plans to trim domestic capacity by up to 12 percent in the fourth quarter. UAL Corp, parent of United Airlines, plans fourth-quarter mainline capacity cuts of up to 16.5 percent.
Now that oil has receded somewhat, airlines are in better shape, but are not expected to reverse any of their cuts even if oil dips below $100. "This is still an alarming situation for the airline industry even if it no longer seems hopeless like it did when oil hit $147," said Joe Schwieterman, a transportation expert at DePaul University in Chicago. "Thanks to the cuts and lower oil, airlines are more in control of their own destiny." "That said, if the economy continues to slow, all bets are off," he added.
Facing their worst sales in a decade, auto makers General Motors Corp, Ford and Chrysler LLC have had to bite the bullet and announce closures of plants producing once-popular gas-thirsty trucks now abandoned by consumers, or the retooling of plants to make smaller, more fuel-efficient cars.
But again, much like airlines, fuel costs have not come down to anywhere near where they could rethink those plans. "We haven't seen the pull-back in oil reflected at the pump yet and even if we do I don't think it will change consumer behaviour," said Mirko Mikelic, a portfolio manager at Fifth Third Bank.
"High oil prices are still too fresh and are at the forefront of consumers' minds." And although a lower oil price brings relief to US consumers and companies alike now, it raises concerns about the state of the global economy and what that means for US exports - the main engine for US growth so far this year.
Comments
Comments are closed.