Rising Oil Prices and Your Wallet
Feb 28th 2011 1:00PM
Updated Feb 28th 2011 5:42PM
Crude oil prices are at a two-and-a-half-year high, and if prices edge up further -- and stay there for a period of time -- this would not only be a drag on economic growth both here and globally (wreaking further damage on everything from hiring to housing to tourism), but it would also impact your wallet.
Here's a look at some of the more immediate effects:
When oil prices rise, you feel its effect most predominantly -- and almost immediately -- at the pump, says Chris Lafakis, an economist with Moody's Analytics. "This is the primary channel through which rising oil affects our economy." According to his estimates, every $1-a-barrel increase in crude oil prices translates roughly into an increase of 2.5 cents at the gas pump. Given that, he says, you should expect to pay $3.50 in a week or two; possibly $4.00 gallon over the summer. And you could even see $5 at some point -- particularly if the unrest in the Middle East spreads to other oil-producing countries such as Saudi Arabia, says Lafakis. Currently, national gas prices average $3.32.
Airfares have already gone up four times this year, compared with three times in 2010. Could they rise yet again? Yes -- since fuel today accounts for about 40% of the industry's costs, and airlines certainly don't want to reduce their profit margins -- but not immediately, says Lafakis. "It takes longer for producers of energy services, as such, to pass costs to the ." But if oil prices stay elevated for a sustainable period of time (think: several months), brace yourself for sticker shock. Expect higher base ticket prices, new fees or price hikes for things like checked luggage.
"There's pressure on raw commodities because of their close connection to the energy market," says Lafakis. Greater use of corn by the ethanol industry, for example, is a leading contributor to soaring prices on everything from meats to eggs, and more: in fact, the prices of corn affects most prices in supermarkets. It's not only used to feed the cattle, hogs and chickens that you'll find in the meat aisle, but it's the main ingredient in lots of stuff, from Cap'n Crunch to Dortitos. Turned into corn syrup, it also sweetens most soft .
As clothing makers struggle with surging costs for labor and raw material (combined, these account for up to 90% of the costs of producing a garment), they can no longer keep absorbing costs if they hope to maintain any kind of strength in their balance sheets. This means consumers will not only see cheaper fabrics/more synthetics, different stitching and fewer embellishments (such as beads, sequins, etc.), but we'll also pay more at the register. How much more ? Dana Telsey, CEO and Chief Research Officer of Telsey Advisory Group, expects clothing prices to rise "in the high single to low double digits" this year.