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WAR WITH IRAQ

Pain Just Starting as High Fuel Prices Work Their Way Through Economy

Layoffs and surcharges already have resulted. Without relief, another recession is possible.

March 25, 2003|Warren Vieth and Aparna Kumar | Times Staff Writers

WASHINGTON — Like a slow-acting toxin, higher energy costs are seeping through the economy.

Gerald Lasseigne, a 53-year-old information systems technician in Donaldsonville, La., lost his job last month when steep natural gas prices forced Triad Nitrogen to shut down its fertilizer plant on the banks of the Mississippi River.

Daylight Transport, a freight company in Long Beach, recently boosted the diesel fuel surcharge it adds to customers' bills. At DuPont Inc. in Delaware, higher energy costs are woven into every strand of Lycra, Dacron and Kevlar the company produces.

Crude oil and natural gas prices have been volatile this year, buffeted by anxiety over war in Iraq and supply concerns related to a cold winter in much of the U.S. Crude prices, which had peaked at nearly $38 a barrel before the conflict started, did beat a retreat when it seemed a vigorous U.S.-led military offensive could bring a quick end to the standoff with Saddam Hussein without severe damage to Iraq's oil fields.

But oil prices rebounded Monday, climbing to more than $28 a barrel, marking their biggest gain in 15 months. By contrast, for most of the 1990s, oil traded below $22 a barrel. And natural gas futures prices now are more than double their average during the 1990s.

A few pennies a gallon here, a few dollars a barrel there, and pretty soon a million jobs are hanging in the balance.

If there's no relief from high prices, Americans could find work harder to come by because the economy will grow more slowly, and a double-dip recession won't be out of the question. Layoffs already have hit airlines and might reach other hard-hit sectors such as chemicals. Profits are bound to be squeezed elsewhere, from automakers to fast-food chains. Pump prices and utility bills could remain stubbornly high, leaving consumers with less money to spend on everything else.

"The energy shocks of the '70s and early '80s arguably were more significant," said chief economist Mark Zandi of Economy.com. "But this is significant enough to make a difference, certainly enough to push us back into a recession."

In Louisiana, Triad needs to keep its natural gas costs below about $3.50 per thousand cubic feet to break even, Lasseigne said. At the time he and 40 others were laid off, natural gas was selling somewhere north of $5.

"Nobody wants to lose their job, especially the way we lost ours, but I can't say I'm bitter to the company," said Lasseigne, a 29-year veteran of Triad who was earning about $60,000 annually when the well went dry.

"I think the government should have stepped in a couple of years ago when they had that energy fiasco in California. And I think the oil companies should have opened up some of those wells they capped back during the energy crisis years, knowing that if they held back production, prices were gonna rise."

And rise they did. In the early 1970s, U.S. refiners were paying about $3.50 a barrel for crude oil, while industrial natural gas users such as Triad were paying about 40 cents per thousand cubic feet. Then came the Arab oil embargo in 1973, the Iranian revolution in 1978 and the Iran-Iraq war in 1980.

Both crude oil and natural gas prices have increased tenfold over the years, bouncing up and down in response to periodic wars, recessions, natural gas "bubbles" and OPEC production decrees.

Last week, many oil traders were betting on a "perfect war" scenario: Hussein's forces would be quickly vanquished, Middle East oil exports wouldn't be disrupted and the price of crude would fall back to the low $20s.

Some experts have been less sanguine. At Goldman Sachs, for example, analysts and economists concluded that even if the war were to go well, crude oil would still cost an average of $30 or more this year.

That's because there is more propping up oil prices than just Iraq: Inventories of oil and petroleum products are dangerously low, the strike in Venezuela has taken some production off-line and political unrest in Nigeria is reducing exports from one of OPEC's biggest producers.

Meanwhile, a long-term imbalance in natural gas markets is expected to keep pushing that commodity's price up.

Higher energy prices sap the economy because they force consumers and businesses to pay more for purchases over which they have relatively little control, leaving them with less to spend on discretionary goods and services. Petroleum price spikes are particularly pernicious because America imports nearly 60% of its crude oil; that money goes straight into foreigners' pockets and is not recycled into the U.S. economy.

Economists say a $10-per-barrel increase in oil prices, if sustained for a year, slows the economy's growth rate by about half a percentage point and reduces disposable income by $50 billion, or about $400 per household. That's enough to add a percentage point or so to the unemployment rate as some hard-hit industries lay off workers and others create fewer new jobs.

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