Businesses tired of being subjected to oil shocks

March 7, 2011

Phoenix Business Journal

Kent Hoover

Gasoline prices already were high before a wave of unrest swept across the Middle East and North Africa, creating a volatile market for crude oil.

Now it looks like America could see a return of $4-a-gallon gas, a factor that helped weaken the economy in 2008 and could stifle hopes for a strong recovery this year. High gasoline prices hurt companies in two ways: They raise business costs, and they leave customers with less money to buy other things.

“Higher oil prices act as a tax on disposable income,” said William Dudley, president and CEO of the Federal Reserve Bank of New York.

They also could lead airlines to raise airfares and force delivery services to increase fuel surcharges. Trucking companies will make less money not only because diesel fuel will become more expensive, but also because they will have less freight to haul, as consumers will reduce spending on other goods so they can fill up their gas tanks.

The price of a barrel of crude oil in the U.S. topped $103 on Feb. 24, then dropped a few dollars over the next few days after Saudi Arabia said it would make up for the disruption in Libyan production. There’s no guarantee, however, that oil prices won’t spike again.

If crude oil reaches $115 a barrel in the second quarter, when the American driving season begins, the U.S. economy would take a significant hit, according to the economics group at Wells Fargo Securities. Such a high price for oil would shave a full percentage point off gross domestic product growth in the second quarter, from a previously projected 3 percent growth rate to 2 percent, according to this forecast.

Business groups back alternatives
This latest oil crisis has led business groups to renew their calls to end America’s reliance on foreign oil. The U.S. now imports 60 percent of its crude oil -- a national security risk and an economic vulnerability, according to the Energy Security Leadership Council.

“The country has to mobilize and take some action to finally address this problem, which has been going on now for an awfully long period of time,” said FedEx Corp. Chairman and CEO Fred Smith, who serves as the council’s co-chair.

The council favors increased domestic production of oil and natural gas. It also proposes electrification of short-haul transportation fleets and wants the federal government to help build the infrastructure to make that possible.

Electrification is going slowly at FedEx. The company has about 25 electric light trucks out of its total fleet of 75,000 vehicles. Smith hopes that number will grow dramatically over the next few years as batteries for electric vehicles improve and become more affordable.

President Barack Obama has called for putting 1 million electric cars on the road by 2015. Tax breaks and federal spending to support this goal, however, may not survive Congress’ plans to reduce budget deficits.

Meanwhile, T. Boone Pickens, chairman of Dallas-based BP Capital Inc., thinks the nation’s trucking industry should convert to vehicles that run on natural gas produced in the U.S.

UPS recently ordered 48 trucks that run on liquefied natural gas to add to its fleet of 1,900 alternative fuel vehicles.

That doesn’t mean diesel trucks have become a relic.

“Despite advances in alternative energy, the trucking industry will continue to depend on traditional diesel fuel for the foreseeable future,” said Rick Moskowitz, vice president of the American Trucking Associations.

Time to change ‘no new wells’ policy?

That’s why opening more areas of the U.S. to oil production is so important, according to ATA and other business groups.

The launch of a new initial well-containment response system makes deepwater drilling safer, the U.S. Chamber of Commerce contends, so the administration should allow drilling to resume in the Gulf of Mexico.

“Industry has stepped up to the plate, and now government should do the same and end the de facto moratorium to get the Gulf back to work for all Americans,” said Karen Harbert, president and CEO of the chamber’s Institute for 21st Century Energy.

On Feb. 28, the government issued its first permit for deepwater drilling in the Gulf since the BP oil spill.

Alaska Gov. Sean Parnell said his state, which currently accounts for 11 percent of U.S. oil production, could produce a lot more if federal agencies would end delays in leasing oil fields and permitting new wells, and open more areas to drilling.

“This is the moment our government must examine its ‘no new wells’ policy,” Parnell said.

The Alaska Wilderness League said the Republican governor’s call for oil exploration in the Arctic is environmentally reckless, and disputed the notion that increased domestic drilling would lead to lower gasoline prices.

Oil produced in the U.S. goes into the world oil market, said league spokesman Emilie Siurrusco. Saudi Arabia could ramp down its production as we ramp up ours to keep prices high.

Drilling more oil wells “isn’t going to solve anything,” she said.

National average gasoline prices (for regular unleaded): Feb. 28: $3.37 Month earlier: $3.10 Year earlier: $2.70 Highest ever recorded: $4.11 (July 17, 2008) Source: AAA’s Daily Fuel Gauge ReportTop sources of crude oil imports, by barrels per day: 1. Canada: 1,930,000 2. Mexico: 1,140,000 3. Saudi Arabia: 1,080,000 4. Nigeria: 986,000 5. Venezuela: 912,000 6. Iraq: 414,000 7. Angola: 380,000 8. Colombia: 338,000 9. Algeria: 325,000 10. Brazil: 254,000 Source: Energy Information Administration

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