Gas Prices Catching Up with Oil's Rise

Oil prices are approaching an all-time high. Now gasoline prices are beginning to catch up.

For most of the summer, consumers in America were insulated from the soaring cost of crude oil. Oil prices jumped by $20 a barrel between May and October, but at the corner gas station, prices fell by about 45 cents a gallon.

"We hit kind of an air pocket in the market, so consumers enjoyed those prices at least easing off a little bit," says analyst Lysle Brinker of the research firm John S. Herold.

That "air pocket" was caused by the collapse of refinery profits. During the springtime, when gasoline supplies were tight, oil refiners were able to charge a premium for their product. By early October, there was plenty of gas in the pipeline, and refiners were forced to cut prices to move the merchandise. The drop in refinery profits more than offset the rising cost of crude.

"We caught kind of a break there, but I think it's turning around now," Brinker says.

Refiners are no longer acting as a shock absorber, so in the past few weeks, the pain of higher crude prices has flowed directly from the oil well to the gas pump. A recent snapshot from the Energy Department showed gasoline prices had jumped 14 cents a gallon in a single week, making it hard to ignore.

"What surprises me is when I go down the road, like yesterday, it was $3.11. And when I came back half an hour later, it was $3.16," says Diane Barker. "It jumped in half an hour. So it just keeps going and going and going."

Something has to Give

Barker stands outside a 99-cent store in San Diego. She's always been thrifty, she says. But as the price of gasoline rises, she's even more conscious about what she spends. Other shoppers at the discount store say rising gasoline prices have forced them to cut back on entertainment.

"I used to go clubbing every Friday with my girls, and now it's every other Friday," says Emerald Murphy, loading groceries into her Chevy Cavalier. "When I get paid, it's gas, rent and cat food. I hope it goes down soon."

Gasoline is still a fairly small part of the average household budget — about 5 percent. But when that budget is tight, something has to give.

"Especially people like us that's retired and on a fixed income, things like going out for dinners, going to sporting events, that's what you cut out," says Sam Moses.

Restaurant consultant Dennis Lombardi of WD Partners says $3-a-gallon gasoline may force a lot of people to eat out less often. Mid-priced, casual restaurants like Applebee's are more likely to feel the pinch than high-end eateries or fast food joints.

"The reason for that is that the very high end, their customer base is a little more insulated from these kinds of price changes," Lombardi says. "And at the bottom end, which would be fast food, a lot of those meals are not replaceable. In other words, it's either that or don't eat."

Slow Holiday Shopping Season

Retailers are also bracing for the effects of high gasoline prices. Some are already offering big discounts in an effort to attract customers during what could be a weak holiday shopping season. Forecasters at Ernst and Young expect holiday sales to grow just 4.5 percent this year, down from nearly 5 percent last year. The firm blames not only high gasoline prices but rising heating bills, as well.

"That generally is less controllable and hits in a bigger amount," says Jay McIntosh, Americas Director of Consumer Products for Ernst and Young. "So if we have a cold November, for example, and consumers get higher heating bills in December, that could hurt the holiday spend."

Still, McIntosh says, the overall holiday season should be "OK" for retailers. High-end department stores and those catering to teenagers should see especially strong sales.

"Luxury retailers are going to continue to do well because their consumers just aren't as hit by economic factors as others," McIntosh says. "And teens are often spending other people's money."

The high cost of gasoline may prompt some consumers to think twice before driving to the shopping mall during the holidays. At the same time, Internet sales are expected to grow this year by 15 percent to 20 percent.

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