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High gas prices are driving a wider wedge between the wealthy and everybody else. The rich are back to pre-recession splurging: Saks Fifth Avenue and Nordstrom customers are treating themselves to luxury items like $5,000 Hermes handbags and $700 Jimmy Choo shoes, and purchasing at full price. At Target and Walmart, shoppers are concentrating on groceries and skipping little luxuries. BJ's Wholesale Corp. said Wednesday that customers are buying more hamburger and chicken and less steak and buying smaller packs to save money.
"The average shopper isn't in the game, except for necessities," said Faith Hope Consolo, chairman of retail leasing and marketing at Prudential Douglas Elliman. At the same time, among the rich, "Luxury products are selling like bread." J.C. Penney, Wal-Mart and home-improvement retailer Lowe's Cos. all said they're noticing their customers are consolidating shopping trips to save money on gas as the average price hovers at $4 a gallon. More than a half-dozen corporate earnings reports this week show that for the affluent, rising prices are merely a nuisance. For others, they can mean scrimping to put food on the table.
The wealthy were the first to start spending again after the recession. Middle-class spending started picking up late last year. But the retail earnings results show that rising prices for gas and food, particularly meat, dairy and produce, have started to erode spending power. It could get worse later this year, when clothing prices are expected to rise 10 percent to 15 percent. Meat prices are expected to rise 6 percent to 7 percent this year and dairy products as much as 5.5 percent, according to USDA estimates.
The bottom fifth of earners, with a median household income is $9,846, spend 35.6 percent of their income on food and 9.4 percent of their income on gas, according to a report by Citi Investment Research. The top fifth, whose median household income is $157,631, spends only 6.8 percent on food and 1.9 percent on gas. So they feel it less.
More Gas prices widen divide between rich, not-rich - Business - Eye on the Economy - msnbc.com
An Associated Press-GfK poll shows the share of Americans who say increases in the price of gasoline will cause serious financial hardship for them or their family in the next six months now tops 4 in 10. Overall in the poll, 71 percent said rising prices will cause some hardship for them and their family, including 41 percent who called it a "serious" hardship. Just 29 percent said rising prices are not causing a negative impact on their finances. By income, 63 percent of those with annual household incomes over $50,000 now say rising prices are causing financial hardship, up from 55 percent in March.
For older Americans, it's worse. The share of seniors expressing financial hardship over gas prices hit 76 percent; it was 68 percent in March. Nettie Cash, 65, of Dallas, Ga., is cutting back on her medicine because of the cost of fueling up her Buick. Cash is still taking her heart pills but is forgoing her inhaler and ulcer medicine for now. "It's not easy," she said. "You have to do what you have to do."
The public's coping strategies are largely unchanged from March, with 72 percent having cut back on other expenses, 66 percent saying they've reduced the amount of driving they do and 48 percent changing vacation plans. Since January, gas prices have shot up about 90 cents, with the national average for a gallon of regular this week at $3.96.
Financial analyst Nicole Polite in Baltimore sold her Nissan Altima recently and is taking public transportation, opting for the bus, rails and walking to get to work. Gas prices were just too high, she says, so she and her boyfriend downsized to a one-car household. She says they kept their Lexus sedan, which requires pricey premium gas. "It's definitely a financial strain because now you have to reassess everything," said Polite, 32. "We don't go out as much. That $20 that we could have used to go to a movie -- now that money has been absorbed by the gas tank."
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Nearly 67 percent of Americans say the cost of fuel has caused financial hardships in their households (shown in the graph above). Low-income Americans are most likely to say rising prices are causing financial hardships.
The poll, conducted May 12-15, found that among the 53 percent of Americans who report having made major lifestyle changes, 16 percent are cutting back on vacation travel, 15 percent are being more careful in planning errands and local trips, and 15 percent have either purchased a more fuel-efficient vehicle or are considering it. Smaller segments report doing less "leisure driving," more carpooling, using public transportation, walking more, biking more and driving more slowly.
Twelve percent of those making major changes say they are cutting back on groceries, clothes and other expenses to absorb the higher fuel costs.
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There's less money this summer for hotel rooms, surfboards and bathing suits. It's all going into the gas tank. High prices at the pump are putting a squeeze on the family budget as the traditional summer driving season begins. For every $10 the typical household earns before taxes, almost a full dollar now goes toward gas, a 40 percent bigger bite than normal. Households spent an average of $369 on gas last month. In April 2009, they spent just $201. Families now spend more filling up than they spend on cars, clothes or recreation. Last year, they spent less on gasoline than each of those things.
Jeffrey Wayman of Cape Charles, Va., spent Friday riding his motorcycle to North Carolina's Outer Banks, a day trip with his wife. They decided to eat snacks in a gas station parking lot rather than buy lunch because rising fuel prices have eaten so much into their budget over the past year that they can't ride as frequently as they would like. "We used to do it a lot more, but not as much now," he said. "You have to cut back when you have a $480 gas bill a month."
Alex Martinez, a senior at Arcadia High School outside Los Angeles, said his family's trips to San Francisco, which they usually take once or more a year, are on hold. As he stopped at a gas station to put $5 of fuel in his car not much more than a gallon he said the high prices are crimping social life for him and his friends. "We're always worrying, 'How are we going to get home. We've got less than half a gallon left,'" Martinez said. "We definitely can't go out as much, and we can't go as far."
As Memorial Day weekend opens, the nationwide average for a gallon of unleaded is $3.81. Though prices have drifted lower in recent days, analysts expect average price for 2011 to come in higher than the previous record, $3.25 in 2008. A year ago, gas cost $2.76. The squeeze is happening at a time when most people aren't getting raises, even as the economy recovers. "These increases are not something consumers can shrug off," says James Hamilton, an economics professor at the University of California, San Diego, who studies gas prices. "It's a key part of the family budget."
More Gas tanks are draining family budgets - Business - Oil & energy - msnbc.com
The average per-gallon gas price in the United States has dropped nearly 17 cents in the past three weeks, and likely will continue to drop further, according to a survey published Sunday. The Lundberg Survey found the average price of a gallon of self-serve regular gasoline as of Friday was $3.74.
Prices so far this year peaked on May 6, when the price hit $4 per gallon nationwide -- just 11 cents shy of the all-time record set in July 2008. On May 20, the last survey conducted, the price was $3.90. That means there has been a drop of nearly 26 cents per gallon over the past five weeks.
"There's a very good chance that pump prices will continue down, because there is an oversupply of gasoline at a time when our demand is weakening from unemployment conditions," as well as reports of a possible output hike from Saudi Arabia, said publisher Trilby Lundberg.
The crude oil price is below $100 per barrel, she said. The closing price on June 10 was $99.29. But Lundberg said she believes that even without increased output from Saudi Arabia, "we will still see lower prices at the pump, because supply is high and demand is weak. ... There's a very good chance it will continue falling."
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The release, which will be done over 30 days, represents half of a 60 million barrel supply hike announced by the International Energy Agency, which includes the United States as one of its 28 member nations. The world consumes 87.5 million barrels of oil a day. Of that total, the United States consumes about 19 million barrels per day, according to Tom Kloza, chief oil analyst at the Oil Price Information Service. The United States produces about 9.8 million barrels so it winds up importing about half of what it produces. The Energy Department said the reserve is at a "historically high level" of 727 million barrels.
"We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery," said Energy Secretary Steven Chu. "As we move forward, we will continue to monitor the situation and stand ready to take additional steps if necessary." Libya is still locked in civil war, as rebels, aided by NATO airstrikes, try to unseat Moammar Gadhafi. Oil prices, which were already sliding Thursday, fell even further after the announcement. "Oil prices are getting assaulted on two fronts today," said Kloza.
In fact, oil and gas prices have been falling for the past several months. The price of a gallon of gas nearly broke $4 in May. Gas prices were selling at $3.61 a gallon Wednesday, according to motorist group AAA. Most experts attribute the price declines to expectations of weaker demand as the economic recovery continues to slow. On Wednesday, Federal Reserve Chairman Ben Bernanke gave a grim assessment. "Bernanke's statement about the 'slowing pace of recovery' was the key to this down move," said Dan Dicker, a former oil trader and author of "Oil's Endless Bid: Taming the Unreliable Price of Oil to Secure Our Economy."
Oil prices plunged $4.29, or more than 4.5%, to $91.12 per barrel after the news about the supply increase. At one point, they plummeted more than 5% to less than $90 per barrel for the first time since Feb. 22. "There is plenty of supply," Kilduff Group partner Mike Fitzpatrick told CNNMoney. "They want to push prices down to help the U.S. economy. Saudi Arabia called for this at the last OPEC meeting." The price of Brent crude -- the European benchmark -- also declined by more than 5%, with prices sliding $6.54 per barrel to $107.67.
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A surprise attack from an unlikely source sent oil prices reeling Thursday. The International Energy Agency, the Paris based research arm of 28 industrialised countries, held an emergency press conference to announce that its members would release 60 million barrels onto the market – allocating two million barrels a day for a month. Half of the total will be coming from the U.S. Strategic Petroleum Reserve. It is only the third time the IEA tapped reserves; the first was in 1991 during the Gulf War, then again in 2005 when Hurricane Katrina wiped out some production in the Gulf of Mexico.
This move triggered memories of G-7 currency interventions in the mid-1980s, the fabled Plaza and Louvre accords, when collective action by central banks was taken to either raise or lower the U.S. dollar. Some market purists were crying foul since governments decided to play an active role to sway prices. But the energy market, with members of the OPEC cartel controlling about 40 percent of production, certainly is not what one would call a free market.
The IEA’s emergency move can be linked back to the OPEC meeting in Vienna earlier this month. The 12 members left without agreeing to raise their production quota of 24.84 million barrels a day. In sum, the price hawks – led by Iran and Venezuela – did not agree with OPEC’s swing producer Saudi Arabia, along with the UAE and Kuwait, on the need to raise production. On the eve of that OPEC gathering, the IEA said that oil above $100 a barrel would undermine growth in the second half of this year. Last week, at the St. Petersburg International Economic Forum, I asked the IEA’s Executive Director Nobuo Tanaka whether that strategy of leaning on OPEC backfired. He said the organization was willing to do its part if others could not raise production; now we know what he was referring to.
While this joint strike attack brought prices down about four dollars a barrel, it will be up to those who hold the spare capacity to continue a downward trend in prices. The IEA says OPEC members have just over four million barrels of extra production they could bring to market – three-fourths of that in Saudi Arabia with the balance shared by the UAE and Kuwait. Saudi Arabia, through a leak to the Middle East newspaper Al Hayat last week, said it would add another million barrels of production in July – ignoring OPEC’s call to leave production where it is. This is a clever and no doubt coordinated one-two punch from the IEA and U.S. ally Saudi Arabia – but it may not be a knock out punch against those wanting to keep oil above the century mark.
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After falling to $3.54 a gallon from May's $3.98 peak, prices have unexpectedly surged the past two weeks to a national average of almost $3.70 a dollar higher than levels a year ago. Industry analysts say prices could climb higher short-term, curbing skittish consumer spending, the main driver behind economic growth. "This is just dismal news for the consumer. There's a lot of fatigue already," says IHS Global Insight economist Chris Christopher, who notes consumers are fretting over jobs, a weak housing market, Europe's looming debt crisis and Washington's political impasse on the debt ceiling.
Signs of economic strength helped boost benchmark West Texas crude oil above $100 a barrel Thursday before closing at $99.13 on the New York Mercantile Exchange, the highest settlement since mid-June. "Prices shouldn't be this high. But rumors and speculation just spook the market," says Patrick DeHaan, senior analyst with price tracker Gasbuddy.com. Most analysts expected prices would be curbed by slower seasonal demand, a broader commodities sell-off and last month's news that the United States and the International Energy Association would sell oil from strategic reserves.
"The market just kind of shrugged that news off," says Naveen Agarwal, CEO of Pricelock, a hedging adviser who forecasts $4.05 gas by year's end, close to 2008's all-time high of $4.11. Near-term, prices are likely to remain below $4 a psychological barrier that spooks consumers, Christopher says. "Unless it's event-driven, we're not on the threshold of another major run-up," says Oil Price Information Service analyst Tom Kloza. "I still think 30 days from now, we'll probably be anywhere from $3.50 to $3.75 a gallon."
Analysts expect prices to begin falling in mid-September, as long as the hurricane season and heightened unrest in Libya or the oil rich Middle East don't disrupt supply. Still, rising demand will push prices up heading into 2012. "Next year, you could see $5 gas," says Francisco Blanch, head of commodity strategy at Bank of America Merrill Lynch. "The only way the consumer can win is by reducing consumption."
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The results were worse than expected, sending BP's share price down during morning trading. The replacement cost profit compares with a loss of $17.0bn in the same quarter of 2010, when the company took a big charge relating to the oil spill in the Gulf of Mexico. In the first quarter of 2011, BP made a profit of $5.5bn. BP has paid $6.8bn in damages to firms, individuals and government departments since the oil spill.
Falling production
BP's oil production was 11% down on the same period of 2010 due to the suspension of drilling in the Gulf of Mexico, maintenance work on some wells and the sell off of some operations. The effects of the lower production were partially offset by the higher oil price, which was inflated by political unrest in oil-producing countries such as Libya.
BP has sold $25bn worth of assets in the US, Argentina, Egypt, Venezuela, Vietnam and Colombia - partly to pay for the clean-up operation in the Gulf. The oil firm's chief executive, Bob Dudley has been criticised by some investors for failing to increase production. In May BP abandoned a proposed deal with Russian's Rosneft to exploit oil reserves in the Arctic. "Other companies have clearly re-defined their strategies over the last 12 to 24 months," said Dougie Youngson an oil analyst at Arbuthnot.
"Exxonmobil continues to build it's shale gas business in the US and Shell is focussed on mega gas projects. What is BP doing?" Investors have also suggested that the share price has not recovered sufficiently from the Gulf spill. "BP is a company that is changing rapidly. We are committed to seeing the true value of the business more strongly reflected in the share price," Mr Dudley told investors.
Continuing clean-up
BP gettin' fat off high prices...
For the first time in months, retail gasoline prices have fallen below $3 a gallon in places, including parts of Michigan, Missouri and Texas. And the relief is likely to spread thanks to a sharp decline in crude-oil prices. The national average for regular unleaded gasoline is $3.51 per gallon, down from a high of $3.98 in early May. Last week's plunge in oil prices could push the average to $3.25 per gallon by November, analysts say.
Economist Philip Verleger equates it to "a stimulus program for consumers," leaving them more money for clothes, dinners out and movies. Over a year, a 50 cents-per-gallon drop in gasoline prices would add roughly $70 billion to the U.S. economy. Arthur De Villar, a 48-year-old safety inspector for the Federal Aviation Administration, paid $2.96 for gasoline near his home in Manchester, Mo., a suburb of St. Louis - and he recently replaced his SUV with a four-door sedan. With three boys at home between the ages of 11 and 14, the money De Villar saves on gas still gets spent. But it goes to the amusement park, a Cardinals baseball game or the movie theater. "It's far better to be able to put (the money) anywhere other than in the gas tank," he says.
Prices for oil, gasoline and other commodities dove last week along with world stock markets over concerns the global economy is headed for another recession. When economies slow, demand for gasoline, diesel and jet fuel falls as drivers cut back on trips, shippers move fewer goods and vacationers stay closer to home. Oil fell to $79.85 per barrel Friday, a drop of 9 percent for the week. Oil reached a three-year high of $113.93 on April 29. Economists caution that gasoline savings, while welcome, won't matter much to people if the worst economic fears come to pass. "Yes it produces some relief, your bill at the gas pump goes down, but it's going down because there are worries that people won't have jobs," says James Hamilton, an economics professor at the University of California, San Diego. "The news has not been good."
And gasoline prices remain historically high. Gasoline has averaged $3.56 this year, the highest yearly average ever. Americans have cut back driving in the face of high prices, but they are likely to spend more on gasoline in 2011 than ever before - close to $490 billion, according to Tom Kloza, chief oil analyst at the Oil Price Information Service. Kloza says the latest drop in prices will stick around through most of the fall. And while that may only add $20 a month to a typical commuter's wallet, drivers say it matters.
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West Texas Intermediate (WTI) light sweet crude oil for November delivery was popping $1.54 to $82.75 a barrel and December Brent crude futures were 86 cents higher at $103.42. The U.S. dollar was down 0.3% to $77.83. "How many times have we seen this eurozone optimism crushed within a matter of days? I have no reason to believe that this time will be any different," says Kingsview Financial trader Matthew Zeman. TAC Energy trader Mark Anderle agrees, and describes the European bailout drama as the "euro yo-yo" that is "driving everything," right now.
Like many traders, Zeman isn't buying into today's market rally, and "skepticism" would be the way to describe the way they're feeling about the headline news out of Europe. He, for one, believes that a default in the eurozone in inevitable -- though an orderly default could provide longer-term relief to the markets. "Either way, the economic recovery is not shaping up in the way the Fed had hoped, and even a Greek solution or default cannot stop the domino effect at this point. I believe we are in a bear market and significantly rallies will be faded by professionals." The trader sees oil hitting key resistance levels at $83 to $84.
A two-day religious holiday that resulted in thin-trading volume Thursday helped magnify the the markets' excited reaction to the approval by the German parliament to extend the European bailout fund. Better-than-expected U.S. jobless claims, gross domestic product and personal consumption numbers took the markets even higher. But "just because jobless claims are under 400,000 -- doesn't mean it'll stay that way, Zeman added. "I think market is being short sighted."
Summit Energy analyst Matt Smith expects oil prices to remain "undecided, volatile and swayed by moves in equities and the dollar," as long as market continue to be forced into reading headline news about Europe and the global economic uncertainty. GRZ Energy trader Anthony Grisanti will continue to follow the equity markets for clues on where the oil markets are going. Positive news for equities, he says, will be taken as positive news for oil, while bad news for equities will be interpreted as bad news for oil. Energy stocks were trading mixed.
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Brent crude oil for December delivery was falling $1.58 to $107.39 a barrel and West Texas Intermediate (WTI) light sweet crude oil for November delivery was tumbling $2.21 to $83.36, largely in reaction to worries that China, the world's largest consumer of energy, will be consuming less oil going forward. China overnight posted a smaller-than-expected trade surplus; and crude imports fell 12.2% year-on-year last month. Meanwhile, copper stockpiles nearly doubled than the amount projected, pointing to less consumption of the metal than expected.
The country spoke of "severe challenges" in the face of the ailing of the global economy. "This is raising concerns about the engine-room of the global recovery, and its appetite for crude going forward," said Matt Smith, commodity analyst at Summit Energy, a subsidiary of Schneider Electric. "Add this to a combo of slipping equities and a euro trundling lower as European debt worries flow (after ebbing thus far this week), and crude laces up its selling shoes to run lower."
The euro was weakening against the dollar Thursday, down 0.7% -- if the euro gets weaker, the dollar gets stronger, leading to weaker oil -- as the markets braced for disappointing developments relating to the European bank recapitalization plans, leading up to the Oct. 23 European Union summit. "Market optimism towards bank recapitalization plans has been steadily building and this point illustrates the complications of getting a broad consensus," say UBS analysts.
Receiving much attention has been a Financial Times article suggesting that European banks are uncomfortable with raising new capital in the means so far suggested by EU policymakers, given the high costs involved. The deep, structural weaknesses of the 17-member euro region's banking sector gnaws at long-time energy analysts such as WeatherBELL Analytics' Alan Lammey, who describes the current state of the European markets as "manic-depressive."
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