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GlobalSecurity.org In the News

Montgomery Advertiser October 17, 2005

Lawn care workers laid off

By David Irvin

High gasoline prices forced Brad Hackett to start slashing away at his lawn care company a few weeks ago. Faced with unmanageable costs, he made a calculated decision and released his employees so he could start taking a check home again.

Co-owner of Pro Scapes Lawn and Landscape, Hackett’s business is in the nexus of a familiar theme these days: cash crunch at the gas pumps.

“Actually, it was their salary versus my salary,” Hackett said of the employees he had to let go. “We are feeling the squeeze, definitely.”

Everything from the diesel Hackett put in his truck to the gas he put in his lawn mowers was eroding his profits.

Tightening up his transportation costs, Hackett now schedules his appointments close together, and the two owners of the company are the only ones cutting lawns anymore.

Economists say Hackett and other business owners had better get used to the idea of high gas prices, at least until the world comes up with a radical new way of fueling its economy.

Keivan Deravi, a professor of economics at Auburn University Montgomery, said several factors are causing today’s high prices. The most recent and poignant reasons are Hurricanes Katrina and Rita, which diminished U.S. refinery capacity.

“You don’t just take the refineries down,” Deravi said. “It takes a slow, deliberate process to bring them down and to bring them up.”

Gas peaked right at $3 a gallon in the wake of Hurricane Katrina. When Rita hit a few weeks later, the prices rose again. The price has dropped some since, to $2.75 on Thursday in some parts of the tri-county area, an indication that supply may be coming back online.

However, a long-term issue that will keep oil and gas prices elevated is the increased pressure China and India are placing on the world’s oil supply as they continue to expand their economies, Deravi said.

Expensive gas is driving up prices across the economy — from retail shops to transportation to services, Deravi said.

The first people to lose jobs in this economic climate will be hourly service workers. Just like Hackett had to scale back his organization to survive the current gas prices, many other service-based organizations will have to do the same if inflation takes hold, Deravi said.

The U.S. Department of Labor reported Friday that consumer prices surged 1.2 percent in September, the largest increase in more than 25 years. The increase in inflation was attributed mostly to a 12 percent increase in energy prices. The Federal Reserve Bank has some hard decisions ahead. Deravi said the Federal Reserve might have to raise interest rates, which would cool off the economy.

The Federal Reserve can control the rate of economic growth by setting the Federal Funds Rate and the Discount Rate, which control what it costs to lend money between institutions, thereby affecting interest rates to consumers.

If that happens, area car dealers could get hit.

“Anytime you experience an interest rate hike, you are going to see the payment go up,” said John Hinson, general sales manager at McConnell Honda. “I hope it doesn’t happen. It will make a difference in the customers’ monthly payments.”

Other industries that rely heavily on financing also will feel the brunt of any interest rate hikes, such as commercial and residential real estate agencies.

There is one spot of good news, however, at least for people who are trying to sell their mid-sized or compact sedans. As the price of gas has skyrocketed in recent months, many SUVs on the market have seen reduced demand. The value of used mid-sized and compact sedans, conversely, actually increased.

Bob Williams, who calls himself “the guy who pays the bills and sweeps the floors” at Family Auto Sales in Montgomery, said the prices of used compacts at the weekly car auctions in the area have increased.

“We are experiencing a big increase with people trading in their larger SUVs for these Honda Civics,” Hinson said. “The biggest trend took place right when we had our little gas interruption after Katrina, and it woke a lot of people up.”

Hybrid vehicles are in strong demand, Hinson said, but economists say there aren’t enough of them to understand how much real, marketwide demand exists. Hybrids get extremely good gas mileage by combining gas and electric engines into one car.

“There is, honestly, not enough nickel to produce hybrid vehicles en masse,” Wachovia economist Jason Schenker wrote in an October release. Nickel is used in hybrid batteries.

One analyst said the gas problems America is facing today are a direct result of faulty projections from the Energy Information Administration, the U.S. agency that projects energy prices.

“Those rocket scientists from the Energy Information Administration — the people who are supposed to protect us from these things — were projecting that oil was going to remain at $20 a barrel until hell froze over,” said John Pike, director of the Alexandria, Va.-based think tank Globalsecurity.org.

Pike refers to the Annual Energy Outlook 1999 report produced by the EIA, which projected that oil prices — unadjusted for inflation — would rise only to $22.73 per barrel by 2020. On Thursday, the price of oil futures on the New York Mercantile Exchange was about $63 per barrel.

This is significant, Pike said, because certain oil fields around the world — such as the Gulf of Guinea off Africa — weren’t tapped because the projected price of oil was too low to make drilling cost effective. The low projections thwarted the future supply of oil, Pike said.

Unless worldwide oil consumption drops, the prices probably will stay elevated for some time, analysts say. Consumption reduction, however, is highly unlikely with the strong growth in overseas economies and diminishing natural resources.

“The thing that is certain is that prices are going to continue to go up, and at some point in the next several decades, supply is going to start to go down,” Pike said. “The proposition that we are eventually going to have to replace gasoline with something else — that’s not an if, that’s a when.”

Copyright 2005, Montgomery Advertiser