“Customers really don’t want to hear it, but fuel prices are skyrocketing, so we have to charge more,” said John Migliorini, vice president of Lakeville Trucking in Rochester, NY, where diesel costs have almost doubled to around $400,000 per month. “What choice do we have? I’ve never seen prices go so high, so fast.”
The company has a fleet of 30 tractor-trailers that haul general merchandise and groceries, including groceries for the Wegmans supermarket chain. Each truck consumes about 100 gallons of diesel per day, Migliorini said.
Record gasoline prices are seeping into day-to-day costs beyond the pump, adding further uncertainty to the economic recovery. Prices hit $4.33 this week after the Biden administration moved to ban imports of Russian oil, bolstering the prospect of higher near-term inflation while threatening economic growth and spending and even redesigning hiring models. Rising energy costs are also complicating the Federal Reserve’s efforts to contain inflation, which hit a new 40-year high this week.
Economists say the punch of rising prices and intensifying geopolitical crisis could dampen the rapid rebound. Goldman Sachs this week lowered its forecast for annual economic growth in the United States, citing “higher oil prices”, and said there was a risk that the United States could enter a recession next year.
But unlike the 1970s, when soaring oil prices triggered a multi-year downturn, the underlying strength of the U.S. labor market, combined with additional household savings and reduced dependence on oil, could help protect the country from economic turbulence.
“Rising energy prices will weigh on US economic growth,” said Peter McCrory, economist at JP Morgan. “But overall, we’re still looking for above-trend growth for the year.”
The average price of a gallon of gasoline jumped 13% this week, according to AAA. Overall gasoline prices are up 38% from a year ago, according to the latest inflation figures from the Labor Department.
This sudden leap creates new challenges for Dennis Coyle, who owns a landscaping business in Morris County, NJ
“My whole business runs on gasoline: cars and trucks, lawn mowers, weeders, leaf blowers,” he said. “The simple math is if prices stay this high, my fuel costs are going to go from $20,000 to $40,000 this year.”
Coyle, whose employees drive Ford pickup trucks, has begun raising prices for some of his customers by $1 or $2 a week, though he is wary of scaring them away.
“In my type of business, if you raise people’s prices, they’ll just go somewhere else,” the 35-year-old said. “It’s really hard to know what to do.”
As gasoline prices rise, consumer spending tends to decline. Every 10% increase in gas and oil prices means consumers will need to spend an additional $23 billion a year to keep up with past spending patterns, JP Morgan analysts have found. But the pandemic has also bloated Americans’ bank accounts, leaving them with an additional $2.5 trillion in savings to help cushion the blow.
“Oil price shocks tend not to have as severe an impact on the overall U.S. economy as they once did, but there are still concerns – not just about energy prices, but about general inflation leading to recession,” said lead researcher Harrison Fell. researcher at the Center on Global Energy Policy at Columbia University. “There’s still a lot of uncertainty about where things might go.”
For businesses that rely heavily on fuel, recent price hikes have already become a major sticking point. Airlines, for example, typically spend around a third of their expenses on fuel, meaning any spike in prices has a noticeable impact. As a result, some international carriers already add fuel surcharges to ticket prices. Alaska Air Group is cutting flights by up to 5% in the first half of the year due to “sharp increases in fuel costs,” it said in a company filing this week.
And while many airlines lock in lower fares by “hedging” oil prices – essentially committing for future use – major US carriers, including United Airlines and American Airlines, do not, leaving them makes them particularly sensitive to fluctuations in energy costs. Experts say airfares, which are already rising due to increased demand and rising jet fuel costs, are likely to increase further in the coming months as the industry takes into account the latest energy shocks.
At the same time, rising gasoline prices could also prompt consumers to cut back on travel and retail spending. Executives at clothing chain Children’s Place said this week that ‘volatility in oil and gas prices and its impact on our customers’ was likely to eat away at sales and profits, while outstripping the benefits of stimulus payments feds last year. Meanwhile, online retailer Overstock.com is already paying more for ground transportation due to rising fuel costs, according to chief executive Jonathan Johnson.
“We feel it,” Johnson said. “And we suspect – although it’s probably a little early to tell – that clients are very careful about how they spend their discretionary income.”
“Higher energy costs impact businesses on both sides of the equation: by driving up their costs and also leaving consumers with less money to spend on other things,” said David French, vice-president senior president of government relations at the National Retail Federation, an industry trade. group. “We’ve seen more than a dollar increase in gas prices in the last year – and something like 60 cents this week alone – which means that many billions of dollars are probably not being spent on other establishments because of gas prices.”
Beyond rising gasoline prices, spikes in energy costs could reshape the mix of U.S. job openings and exacerbate labor shortages in some industries, Guy says. Berger, senior economist at LinkedIn. Sectors like leisure and hospitality, which have been rapidly hiring workers in recent months, could cut spending if consumers start canceling travel plans due to rising prices.
On the other hand, energy and mining companies – where hiring has stagnated during the pandemic – could see an upsurge in demand.
“If crude oil prices remain exorbitant, that will reallocate job openings between sectors and geographies,” Berger said. “So far, energy and mining have been among the worst performing industries during covid, but that could quickly change.”
In Palestine, Texas, EasTex Solar increased its workforce by 30% last year to meet demand, according to owner Cal Morton.
Demand for solar panel installations with battery storage quadrupled in early 2021 after severe winter storms left much of the state without power for days, he said. Business has remained buoyant ever since and continues to increase week by week.
“People in Texas have a real awareness of energy prices and are starting to realize that prices won’t stay cheap forever,” he said. “Many have just received their highest electricity bill of the year and, at the same time, they fear that energy prices will soar because of the war.”