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What If Oil Hits $200?

OVER A BARREL

As forecasters absorb that possibility, they envision profound changes in the way we work and how we live

June 28, 2008|Martin Zimmerman | Times Staff Writer

About this series

This is the first in a series of occasional articles looking at how skyrocketing oil prices are transforming lives in Southern California and around the world.

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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 L.A. 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 40% 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 18% 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 10 million vehicles off the roads over the next four years, Jeff Rubin, chief economist at CIBC World Markets, wrote in a recent report.

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