Gas prices act as brake on family budgets

Lean fuel supplies have kept prices high, so consumers must cut back elsewhere.

Every time Eugene Mendez pulls up to the gasoline pump, he thinks about how much it's going to cost to keep his blue Cutlass Supreme on the road. Right now, with gas prices up 23 cents a gallon over last year, he thinks it may mean he'll spend less on his three children over the holidays.

"The gas money's got to come from someplace," says Mr. Mendez, who uses the car to transport documents around Manhattan.

Mendez is not alone. By remaining high this fall, gas prices are acting like a tax increase, experts say. "It's like writing a check out to the federal government, but instead it's going to the energy producers," says Mark Zandi, chief economist at the economy.com in West Chester, Pa. "But, it's more pernicious than a tax increase because it's hitting the lower-income more."

Normally, drivers like Mendez would have seen lower gas prices by now, since Americans usually cut down on their consumption of fuel after the summer.

But this fall, although gasoline prices have fallen 7 cents a gallon from their peak in June, they are still 18 percent higher than last year, and 48 percent more than two years ago.

No relief from OPEC

And unfortunately, energy analysts are not expecting energy prices to fall anytime soon. This week, the Organization of Petroleum Exporting Countries (OPEC) said it would not increase oil supplies but would reconsider the situation in January.

For consumers, this means it could be a winter of tight supplies. For example, yesterday the Energy Information Administration (EIA) reported gasoline inventories have fallen to their lowest level in three years and their second-lowest level in a decade.

The high prices also come just as cold weather is starting to hit the US. Already, the price of home heating oil and natural gas have shot up on the futures market in anticipation of a colder-than-normal winter.

"This is the critical time for energy prices. If we get severe weather, the price of crude oil might go above its old high of $37.80 a barrel set on September 20th," says Mike Fitzpatrick, an analyst at Fimat, an energy trading company. (On Monday, December crude oil futures closed at $34.47 and home heating oil moved over $1.01 a gallon.)

Ironically, the government may be partly responsible for higher home heating oil prices. This fall, the Department of Energy purchased 2 million barrels of heating oil to serve as an emergency reserve for the Northeast.

"Ideally, they should have filled it last spring," says Ron Planting, an energy analyst at the American Petroleum Institute (API), an industry lobbying organization opposed to any government intervention in the markets.

At the same time that the government was buying heating oil, it was releasing 30 million barrels of crude oil from the Strategic Petroleum Reserve. Immediately after the government announced it was selling the oil, crude prices fell. "You could argue prices would have been higher if the government had not acted," says Mr. Planting.

The EIA is surprised that oil prices have remained high. In an analysis this month, the agency stated, "Oil prices are defying gravity." It expects oil prices will fall "sooner or later" by as much as $4 to $5 per barrel, under the weight of excess supply.

If the EIA is correct on the future price of crude, then the price of gasoline might also drop. The government projects that gasoline prices will fall this winter and continue to drop until next spring. "

For 2001, we expect an annual average price dip of about 11 cents per gallon at the pump," the EIA says.

That can't come too soon for Maria Cruz, who estimates it now costs her $30 to $40 to fill up her Chevy Silverado. The Lowell, Mass., resident says high gas prices mean she will cut down on her holiday spending for her two children. "We have to cut down somewhere," she says.

Cutting back on clothes

Daniel Espichan, who pays $1.85 a gallon for gasoline in Queens, N.Y., says he has already cut down on buying clothes and snacks on the street. He, too, may have to reduce the amount he buys for the holidays.

There are already signs that this is happening nationally. Yesterday, the government reported that sales at US retail sales edged up by only 0.1 percent in October. New-car sales dropped 1 percent in October after a 1.6 percent jump in September. Now, retailers are bracing for only modest gains in sales this Christmas compared to 8 to 9 percent gains the past two years.

The moderation in spending comes as the Federal Reserve is meeting in Washington to discuss interest rate policy. Analysts expect the Fed to keep rates unchanged at its meeting this week.

(c) Copyright 2000. The Christian Science Publishing Society