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Not Everybody at the Party Is Toasting Oil Prices' Plunge

Energy: It's good for drivers at the gas pump, and for airlines. But there are others who pay when crude takes a dive.

April 19, 1998|NANCY RIVERA BROOKS | TIMES STAFF WRITER

After a brief scare from OPEC's price-boosting antics this spring, oil has stabilized once again at bargain levels. And that means an entire barrel still costs about the same as a so-so bottle of champagne. A gallon of gasoline can still be had for about a third the price of a bottle of Thunderbird.

Moreover, the failure of OPEC to significantly cut oil production suggests that these extraordinary prices will be around for a while. That means big-time celebrating for a wide range of oil dependents, from the obvious, such as airlines and freeway drivers, to the obscure, including the makers of Tupperware and toothpaste.

The ultimate celebrant, in addition to the White House, should be the consumer. The collapse in the price of oil boosts the economy by helping to hold down inflation. That, in turn, is preventing the U.S. economy from overheating--and helping to defuse other potential problems, such as the spread of the Asian economic crisis.

"The lower oil prices are, to some extent, mitigating the effect of the 'Asian flu' on the U.S. economy," said Gordon Richards, economist with the National Assn. of Manufacturers. "What we're losing in exports to Asia, we are partly making up in lower oil prices."

Of course, not everyone is celebrating.

Among those staying home are oil companies; makers of small, fuel-efficient autos; promoters of alternative energy; and foreign countries--notably such poor nations as Mexico, Russia and Indonesia--whose fortunes are closely tied to the price of crude. Some marginal wells in the United States have been closed down, and the people who work them are taking pay cuts or losing their jobs.

But hydrocarbons remain so ubiquitous in industrial nations that today's unexpectedly low prices benefit virtually every niche of the economy and ripple throughout the manufacturing chain, reducing inflationary pressure on countless products.

"It's a plus for the economy as a whole to the extent that it puts more purchasing power in the hands of

households," said Wells Fargo economist Gary Schlossberg. "This represents a tax cut for consumers."

Except for the price of fuel itself, don't hold your breath waiting for retail prices of goods and services to start tumbling because of oil deflation.

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Indeed, few companies can be exp ected to pass along oil-related savings to consumers in the form of lower prices, said Rajeev Dahwan, an economist with the UCLA/Anderson Business Forecast Project.

"If it's just a blip in the road for six months or so, the producers are not going to change prices, because there's a cost to changing prices," Dahwan said. "I see this as a temporary reprieve.

"This will be a good pressure-release valve on profits," he said. "It may put some extra profits into companies, which will balance off the rising wage pressures" that many companies are beginning to feel.

The price of crude oil, which stood at $23 a barrel as recently as September, traded as low as $12.80 in early March. A production-cutting agreement by the Organization of Petroleum Exporting Countries succeeded in pushing up prices to the $15-$16 range. On Friday, the May contract for light crude closed at $15.46 on the New York Mercantile Exchange.

Similarly, gasoline prices--bumping $2 a gallon in Southern California less than a year ago--tumbled below 90 cents last month before the OPEC deal and increased seasonal demand nudged them back up to just over $1 a gallon.

Those are 1960-level prices, when inflation is taken into account. And although the advent of warm weather always boosts demand and thus prices for gasoline, the outlook is for continued moderation.

"Current supply exceeds demand and stocks are high, suggesting a continuation of a difficult market for producers," according to the Paris-based International Energy Agency. Supply exceeded demand by 1.5 million barrels a day in the first quarter of the year, the global watchdog group said.

Any company that makes a living by moving things around is enjoying lower costs.

Airlines spend more on jet fuel than anything else except labor. Fuel accounts for 12% of operating expenses, said David Swierenga, chief economist for the Air Transport Assn. of America.

A gallon of jet fuel sold for an average of 50 cents during the first quarter, down from 71 cents during the same period last year, saving the industry $900 million in fuel costs during the quarter, he said.

"It's a pretty dramatic reduction in our cost structure," Swierenga said.

So where's the airline price war? "Market conditions are the prime drivers of fares," not an airline's costs, Swierenga said. "Lower costs make fares able to come down, and I expect they will eventually."

Truckers, too, are happy to be paying less for their diesel fuel, which accounts for 30% to 40% of a trucking company's overhead. So those lower prices can mean cheaper transportation for those shipping goods by truck, more profit for the trucker or both.

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