[R-G] [BillTottenWeblog] Envisioning a World of $200-a-Barrel Oil

[Bill Totten]

by Martin Zimmerman

Los Angeles Times (June 28 2008)


The more expensive oil gets, the more Katherine Carver's life shrinks.
She's given up RV trips. She stays home most weekends. She's scrapped
her twice-a-month volunteer stint at a Malibu wildlife refuge - the trek
from her home in Palmdale just got too expensive.

How much higher would fuel prices have to go before she quit her job?
Already, the 170-mile round-trip commute to her job with Los Angeles
County Child Support Services in Commerce is costing her close to $1,000
a month - a fifth of her salary. It's got the 55-year-old thinking about
retirement.

"It's definitely pushing me to that point", Carver said.

The point could be closer than anyone thinks.

Three months ago, when oil was around $108 a barrel, a few Wall Street
analysts began predicting that it could rise to $200. Many observers
scoffed at the forecasts as sensational, or motivated by a desire among
energy companies and investors to drive prices higher.

But with oil closing above $140 a barrel Friday, more experts are taking
those predictions seriously - and shuddering at the inflation-fueled
chaos that $200-a-barrel crude could bring. They foresee fundamental
shifts in the way we work, where we live and how we spend our free time.

"You'd have massive changes going on throughout the economy", said
Robert Wescott, president of Keybridge Research, a Washington economic
analysis firm. "Some activities are just plain going to be shut down".

Besides the obvious effect $7-a-gallon gasoline would have on commuters,
automakers, airlines, truckers and shipping firms, $200 oil would drive
up the price of a broad spectrum of products: Insecticides and hand
lotions, cosmetics and food preservatives, shaving cream and rubber
cement, plastic bottles and crayons - all have ingredients derived from oil.

The pain would probably be particularly intense in Southern California,
which is known for its long commutes and high cost of living.

"Throughout our history, we have grown on the assumption that energy
costs would be low", said Michael Woo, a former Los Angeles city
councilman and a current member of the city Planning Commission. "Now
that those assumptions are shifting, it changes assumptions about
housing, cars and how cities grow".

Push prices up fast enough, he said, and "it would be the urban-planning
equivalent of an earthquake".


Consumers

With every penny hike in the price of gas costing American consumers
about $1 billion a year, sharply higher pump prices would lead to
"significant bankruptcies and store closings", said Scott Hoyt, director
of consumer economics at Moody's Economy.com.

Consumer spending has held up surprisingly well in the face of
skyrocketing pump prices - bolstered in part, perhaps, by federal tax
rebates. But the same day the government reported a 0.8% rise in May
consumer spending, a research firm said consumer confidence had plunged
to its lowest level since 1980 - hinting at the catastrophic effect
another big gas price surge could have on retailers and customers.

"The purchasing power of the American people would be kicked in the
teeth so darned hard by $200-a-barrel oil that they won't have the
ability to buy much of anything", said S David Freeman, president of the
Los Angeles Board of Harbor Commissioners and author of the 2007 book
Winning Our Energy Independence.

BIGresearch of Worthington, Ohio, said more than half of Californians in
a recent survey said they were driving less because of high gas prices.
Almost 42% said they had reduced vacation travel and forty percent said
they were dining out less.

If any retailers would benefit, it would be those on the Internet. In a
recent survey by Harris Interactive, one-third of adults said high gas
prices had made them more likely to shop online to avoid driving.

Restaurant operators such as Brinker International, which owns the
Chili's and Romano's Macaroni Grill chains, are suffering and are likely
to struggle even more as consumers look for ways to reduce spending.
Fast-food chains wouldn't be immune, experts say, although they might
fare better as families downscale their dining choices.

Vehicle sales, too, would probably continue to tank. Sales of new cars,
sport utility vehicles and light trucks fell more than eighteen percent
in California in the first quarter compared with a year earlier.
Although some consumers have been shopping for smaller, more
fuel-efficient vehicles, many dealers are demanding premiums for
gas-sipping hybrids, wiping out much of the financial advantage of
buying one.

Nationwide, $200 oil and $7 gasoline would force Americans to take ten
million vehicles off the roads over the next four years, Jeff Rubin,
chief economist at CIBC World Markets, wrote in a recent report.

As for the state's beleaguered housing market, prices are falling faster
in areas requiring long commutes - such as Lancaster and Palmdale - than
in neighborhoods closer to job centers.

Sky-high gas prices "would basically reorient society to where proximity
would be more valuable", said Tom Gilligan, finance professor at USC.

Americans may also feel the effects of a rise in energy-related crime.
Ads for locking gas caps are becoming more prevalent. Restaurant owners
are complaining that thieves are helping themselves to used barrels of
cooking oil, which can be home-brewed into biodiesel fuel.


Transportation

Workers stuck with long commutes and gas-guzzling cars would look
increasingly to public transit, experts say.

Already Californians' mobility is being curbed. Traffic on the state's
freeways fell almost four percent in April compared with a year earlier,
and ridership on many subway and bus lines operated by the Los Angeles
County Metropolitan Transportation Authority has risen in recent months.

But a huge influx of riders would strain aspects of the system, MTA
says, noting that many buses are overcrowded at rush hour now.

Quickly adding capacity to meet demand from new riders wouldn't be easy,
because new buses cost hundreds of thousands of dollars and take up to
two years to deliver.

Transit advocate Kymberleigh Richards said new riders on popular routes
such as Wilshire Boulevard, Vermont Avenue or Sherman Way in the San
Fernando Valley "are going to have a bit of a culture shock. It's a
different world to be using public transit when you're used to being in
your own vehicle by yourself."

Just how many drivers would become public-transit riders if oil surges
to $200 a barrel is hard to predict, but there's a big pool of potential
customers. About 87% of Southern Californians commute by car, according
to 2005 data from transportation expert Alan Pisarski. That compares
with 63% in New York and its environs.

Travelers can also expect much fuller airplanes and much more expensive
flights - when they're available at all. Delta Air Lines Inc, for
example, recently said it was cutting about thirteen percent of its
flights from Los Angeles International Airport to save fuel.

It also could mean shifting flights from outlying airports such as
Ontario to LAX to cut overhead costs, said Jack Kyser, chief economist
for the Los Angeles County Economic Development Corp. Carriers probably
would also trim flights in highly competitive air corridors such as Los
Angeles to the San Francisco Bay Area.

Even the cost of getting away from it all on Santa Catalina Island would
go up. Greg Bombard, president of the Catalina Express ferry service,
has trimmed schedules, raised fares and reduced hiring to make up for
fuel costs that have risen sevenfold since 2002. Another big increase
and he says he'll have to ask state regulators, who control his rates,
to OK another fare hike.


Trade

The fee increases on the ferry would be nothing compared with the added
cost of transoceanic shipping if oil goes to $200. Some experts say high
energy costs are altering global trade and slowing the pace of
globalization.

It takes about 7,000 tons of bunker-fuel to fill the tanks of a
5,000-container cargo ship for a trip from Shanghai to Los Angeles. Over
the last year and half, the cost of that fuel has jumped 87% to $552 a
ton, according to the World Shipping Council, boosting the cost of a
fill-up to more than $3.8 million.

"To put things in perspective, today's extra shipping cost from East
Asia is the equivalent of imposing a nine percent tariff on East Asian
goods entering North America", said Rubin of CIBC World Markets. "At
$200 per barrel, the tariff equivalent rate will rise to fifteen percent".

If oil continues to rise from current levels, officials at the Port of
Los Angeles believe West Coast ports would gain business because they
are ten to twelve days' sailing time from Asia, versus the eighteen- to
twenty- day route from Asia to the East Coast through the Panama Canal.

But local ports could lose business if shipping costs get so out of hand
that companies begin shifting production back to North America from Asia
- something that's happening in the steel industry, Rubin said.

Local distribution patterns could change too. Stephen Gaddis, chief
executive of Pacific Cheese Company, a Hayward, California, cheese
processing and packaging firm, thinks high fuel prices will push
restaurants, retailers and food manufacturers to look for suppliers
closer to their operations.

"Local sourcing is ideal. You won't pay as much for freight, and when
you use less fuel it's better for the environment", Gaddis said.

Soaring diesel prices will make companies rethink whether they should
have large, centralized plants or build smaller ones around the country.

That's what Pacific Cheese is doing. It's building a packaging plant in
Texas to be closer to one of its larger suppliers and expects to serve
its Southwestern clients from there.

In the near future, however, consumers can expect to pay for the higher
cost of producing food and moving it around the country, say food
executives, farmers and economists. Even having a deep-dish pizza with
extra cheese brought to your door costs more now that chains such as
Pizza Hut are charging for delivery.


The workplace

Dramatically higher transportation costs would usher in an era of
virtual mobility, or zero mobility, for many workers.

"We're seeing companies go to four-day workweeks, place increased
emphasis on working at home, show bigger interest in setting up
satellite offices - anything that gets commute times down and gets
people off the road", said analyst Rob Enderle of Enderle Group in San Jose.

Videoconferencing, touted as "the next big thing" for years, would
finally have its day, thanks to improved technology and a desperation to
cut corporate travel budgets.

Telecommuting, or working from home, is easier than ever because of the
spread of high-speed Internet access, said Jonathan Spira, chief analyst
at Basex Inc, a business research firm in New York. In particular,
workers in "knowledge" jobs that can be performed with computers and
phones would benefit.

But Gilligan of USC noted that lower-income workers tend to be in jobs
that don't favor telecommuting, such as retail and food service.

"These are the same people who are already being creamed by the mortgage
crisis", he said. "The impacts of energy price increases are highly
disparate".

Although white-collar workers may be able to telecommute, they could
also take a serious financial hit because soaring energy prices tend to
wreak havoc on the stock market. The explosion of 401(k) plans and
similar retirement accounts in the last few decades - and the decline of
traditional pensions with guaranteed payouts - have tied workers'
financial futures more closely to stocks than they were during the 1970s
oil shocks. A prolonged Wall Street downturn could mean a no-frills
retirement, or none at all.


Upsides

It wouldn't all be bad, of course. Some industries could boom, providing
jobs and tax dollars. California has seen a jump in drilling activity as
oil companies try to extract more crude from the state's fields.
Regulators expect a record 4,000 wells to be drilled in the state this year.

"Every rig and every crew that's available is working right now", said
Hal Bopp, the state's oil and gas supervisor.

And as rising oil prices make alternative-fuel vehicles more
cost-effective, California companies such as Tesla Motors Inc, which
recently began production of a $100,000 all-electric sports car, could
become important leaders in an emerging industry.

Tourist attractions may also see an upswing in local business as
families look for less-expensive vacation alternatives close to home. A
recent survey by travel insurer Access America found that 26% of
Americans would cut back on recreational travel as a first response to
higher gas prices.

In Southern California, with its many natural wonders, theme parks and
other attractions, the prospect of a "staycation" may be less
disappointing than for a resident of, say, Nebraska. And movies, a
staple of the local economy, may prosper as Americans seek escapism and
a (relatively) cheap night out.

And spending less time stuck in traffic on the 405? Priceless.

"More carpooling, fewer people on the freeways, more telecommuting - in
many ways, what would happen is what people have been trying to make
happen for a long time", USC's Gilligan said.

http://www.latimes.com/business/la-fi-oil28-2008jun28,0,5485259.story


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