Rising Gas Prices
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JEFFREY BROWN: Prices at the pump had already been high throughout this summer, but in the last few days they jumped dramatically higher still. A gallon of unleaded regular gas rose more than 18 cents in the last week, to a national average of $2.55. In some stations, the $3 mark has been breached. Also today, the government reported a spike in consumer inflation in July that was largely due to the rise in energy costs.
We look at gas prices and their impact now with: Mantill Williams of the American Automobile Association, AAA; and Mark Zandi, the chief economist for economy.com. Welcome to both of you. Mr. Williams, starting with you, as always, there is a range of prices around the country. Where are they the highest right now?
MANTILL WILLIAMS: Well, Jeffrey, the highest is in the West, particularly California and also Nevada and Hawaii. Hawaii has some inland problems. And the lowest is usually in the Southeast, you’ll see some prices low in South Carolina, Mississippi and Georgia, those type of states.
JEFFREY BROWN: What accounts for these regional differences?
MANTILL WILLIAMS: A number of things, number one of course the taxes, each state has their own particular tax and that accounts for about 19 percent of the actual price, and then of course the requirements for reformulated gasoline. For instance, California has special environmental requirements. So they require a certain blend which can be a little more expensive, and also distribution points, where the actual state is in the main distribution point. Gasoline comes into the United States sort of a little bit east of the Mississippi. So points that are farther west of the Mississippi sometimes usually have a little bit more expensive price, and then of course just basic economic factors such as labor costs, such as land use issues because we even know for instance in Utah, even though it’s somewhat west of the Mississippi, those prices are pretty low just because of the retail labor costs that are in that state.
JEFFREY BROWN: We had a discussion on the program the other day about why this is happening, and people cited the international pressures and the hike in crude oil, and all the usual supply and demand. But even since then we have this big spike. What’s your explanation, why did it happen so fast?
MANTILL WILLIAMS: Yeah, I think you’re right. We have the high price of crude oil right now is trading at over — around $67 a barrel. And then in addition to that, you talk about the anxiety that we have, the world markets have in Iran’s position in developing nuclear weapons. And then of course, it’s the demand. Demand is up around 2 to 4 percent, and then you talk about world demand, China is now emerging as a major, major force in terms of using petroleum. So you do have some demand issues. And a lot of it also is speculation in the market. There’s a little nervousness and speculation about what may happen in the future. So some of this is being driven by speculation, it’s not just pure supply and demand.
JEFFREY BROWN: Mr. Zandi, you look at how we Americans spend our dollars. How much of it goes to energy costs, specifically gas, and how much do we feel quickly when something like this happens?
MARK ZANDI: Well, the average American spends about 6 percent of his or her budget on energy. And that’s the whole shooting match, that’s gasoline, home heating, electricity; about half of that is gasoline. And that’s up quite substantively over the past three years. If you go back three years ago before the run-up in prices it was about 3 percent of the budget, so it’s significant and rising and it has a quick impact, particularly on lower and middle income households who don’t have other financial resources.
JEFFREY BROWN: What about American industry, I would assume that the direct hit is for of course in the transportation industry; what do you see happening there?
MARK ZANDI: Yes, you’re right. The transportation industry is getting socked, particularly the airlines. Delta is close to bankruptcy, and in large part because of the higher energy costs. Air freight companies, UPS, Fed Ex, are having some difficulty, trucking companies also have problems. Manufacturers as well, energy intensive manufacturing, processed materials, chemicals and even industries that rely on electricity are starting to have some problems because natural gas prices are also up and natural gas is an important feed stock into electricity. So it’s a problem across much of the transportation sector and increasingly across manufacturing.
JEFFREY BROWN: Are they able to pass on the cost; in other words, is this another way in which consumers feel the price hike?
MARK ZANDI: To some degree. The airlines are having obviously some difficulty passing it through, but even they’re having some more luck recently. Airline tickets are up 7 percent over the past year, we saw that in today’s consumer price inflation report. The trucking companies are having more luck; they’re passing that through to retailers and other of their customers who are trying to pass that through to consumers. So far at least the run-up has been quite modest in overall inflation. Most of the impact is being felt by businesses, they’re having to he’ll these higher prices.
JEFFREY BROWN: And, Mr. Williams, do you see a more price-conscious consumer out there with the price at the pump? I mean, what are people doing to fine ways around it or to find better prices?
MANTILL WILLIAMS: Yeah, I think so, Jeffrey. People are feeling the impact. I think a couple of things they’re doing is, we’ve seen sales of premium and mid-grade actually plummet. People are now using self-serve, regular unleaded when they can, and I think they are shopping with their steering wheel; they are going for the cheapest price. No longer are they going for mid or premium and no longer are they being loyal to a particular brand. They’re going for the cheapest price. And we always tell people that if you don’t have to use mid or premium, use that self-serve, regular unleaded if your manual says it’s okay.
JEFFREY BROWN: I was reading that some big retailers are offering lower prices. How are they able to do that? We’re talking about the COSCO’s and the Wal-Mart’s, how do they do that?
MANTILL WILLIAMS: Yeah, sometimes retail distributor can offer a lower price if they can kind of balance it with their selling other things. For instance if they’re selling coffee or hot dogs or they have a reason such as COSCO to bring someone to their particular facility where they can make up the difference in selling some other type of goods or products, so sometimes they can sell the gasoline by making a very little profit or just breaking even on it in hopes that they’ll come out on the other end by selling some other good or service.
JEFFREY BROWN: I also read about some new online services where people can be informed pretty much up to the minute on where the best prices are.
MANTILL WILLIAMS: Exactly. It’s funny, the Internet —
JEFFREY BROWN: This is a new part of our industry.
MANTILL WILLIAMS: This is a new part of the industry that the Internet has established on a number of sites, particularly, as a matter of fact, on AAA’s site in a number of regional areas, you can actually type in your zip code and put in a five- or ten-mile distance and it will show you the cheapest place you can shop for gasoline, and a number of sites are also doing that.
JEFFREY BROWN: Mr. Zandi, back to the macro level, we cited the inflation; you just referred to that a little earlier. Do we see much of an impact yet at the macro level on the U.S. economy?
MARK ZANDI: Surprisingly it’s been very small. We haven’t seen nearly the impact that I would have thought at this point. If you had asked me a year ago that if we were facing 65 bucks a barrel of oil what would happen, I’d be pessimistic, and the economy is strong. We’re experiencing good solid sturdy growth. And I think it’s due to a couple things, one, the job market is improving, recruiting more jobs, they’re broad-based across occupations, wage growth is improving. And perhaps even more importantly the housing market has gone skyward and many of us are pulling lots of cash out of our homes and, you know, we take that cash and some of it goes into our gasoline tank, but we’ve still got plenty left over, at least at this point.
JEFFREY BROWN: At what point would you expect to see some change? I know you said what you would have thought a year ago. Now look ahead for us.
MARK ZANDI: Well, you might have to take that with a grain of salt given what I said a year ago. But I think we come to wintertime; it’s cold, if gasoline prices are roughly where they are today and on top of that we’re going to be paying higher home heating bills, then I think we’ve got a problem.
JEFFREY BROWN: All right, Mark Zandi and Mantill Williams, thank you both very much.