More Money in Most Pockets

By George Russell

The wave of collapsing oil prices might not have crested yet, but it is already having profound effects on U.S. consumers and businesses. The most immediate result is dramatic cuts in the prices of gasoline, heating oil and diesel fuel. When it comes to oil-based products, ranging from plastics to pesticides, the effect will be more gradual and unpredictable. And the saving in the energy-cost component of virtually every kind of manufactured goods will be even more subtle. Ultimately, though, the U.S. is headed for a sweeping shift in the way Americans spend their money, as dollars saved on energy are invested or consumed elsewhere.

Overall, the price plunge is acting, in the words of Merrill Lynch Analyst Constantine Fliakos, "like a huge tax break" for the U.S.--or at least for those Americans who are not in the oil business. February's dramatic .4% fall in the Consumer Price Index, the biggest decrease since 1953, was largely the result of dropping oil prices. Says Maryann Keller, an auto analyst at Vilas- Fischer Associates: "The real impact of declining oil prices is what you're going to do with the extra money in your wallet after you've visited the gas station. Maybe you're going to go out and buy a pair of shoes. Maybe you're going to take a vacation. It's going to mean a big increase in real disposable income." Agrees Merrill Lynch Chief Economist Donald Straszheim: "The oil- price decline is like a blood transfusion to a wounded patient. As the victim pulls through, we'll see one pleasant surprise after another."

The sheer size of the potential petroleum "tax break" is stunning. Last year the U.S. economy consumed some 15.7 million bbl. of crude oil a day, at an average price of $27 per bbl. Total cost: $155 billion. According to the Washington Analysis Corp., an economics- and market-research firm, a petroleum price of about $10 per bbl. for the rest of 1986 would boost American disposable income by $84 billion this year, or roughly $330 for the average wage earner. More conservatively, a Department of Energy economist estimates that if the average price of crude stabilizes this year at $15 per bbl., the saving would be $69 billion.

A large part of the windfall will go to motorists. As if to revel in that prospect, radio stations across the country last week offered cash prizes to the service-station operator who "bid" to sell his product at the lowest price. In Milwaukee, the Park Plaza Mobil station sold off 8,000 gal. of regular unleaded at 36.9 cents per gal. In Concord, Calif., the Sun Valley Auto Wash, a Chevron station, offered gasoline for .1 cents per gal., while in Diamond Bar, Calif., George Benitez's Shell service station went one better by offering for one day up to 30 gal. of regular leaded per customer at .00l cents per gal. Then, overwhelmed by the task of making change, Benitez dropped the charge altogether. In scenes that were ironically reminiscent of the gas- shortage panics of the 1970s, motorists in several states lined up for hours to take advantage of the fleeting bargains.

Even away from the hoopla, a gallon of regular unleaded gasoline was selling for an average of 93 cents across the country, vs. $1.13 at the same time last year. Dan Lundberg, who puts out the Los Angeles-based Lundberg Letter on the gasoline industry, expects the price difference between this year and last for all types of gasoline to reach an average of 21.6 cents per gal. If that happens, Lundberg says, the U.S. will spend roughly $23 billion less for gasoline than last year's bill of $128.5 billion.

The slump in U.S. heating-oil prices from an average of 66 cents per gal. in January to 51.5 cents last month was worth an estimated $2 billion to consumers and businesses. The Washington Analysis Corp. projects that Americans could save as much as $12.5 billion on heating oil over the entire year.

Transportation industries can expect substantial relief. Commercial airlines, which used 12 billion gal. of jet fuel last year, could save around $120 million for every penny per gal. drop in fuel prices this year. In January jet fuel cost 80 cents or more per gal. Now some companies are buying it for 55 cents. Says Joseph Hopkins, a spokesman for Chicago-based United Airlines, which alone saves $20 million a year for every 1 cents fuel-price reduction: "We can take quick advantage of price breaks." Donald Burr, chairman of Newark-based People Express, now the fifth largest U.S. carrier, says that his company is getting "terrific savings." In the first quarter of 1986, People cut its fuel bill by as much as $16 million, or 30%. The oil- price plunge may not result in lower air-fares, since they have already been slashed by the recent discount wars, but reduced fuel costs may keep airlines from having to push ticket prices back up.

The U.S. trucking industry, which hauls about 75% of the nation's goods, projects that lower diesel-fuel costs will save it $7.7 billion this year. Bus lines and local transit systems will benefit as well. Theodore Weigle, executive director of the Chicago Regional Transportation Authority, estimates that the decline in diesel-fuel prices could save his agency as much as $7 million in 1986. But for American railroads, the oil-price drop is a mixed blessing. The good news is that most U.S. freight trains are diesel powered; at Norfolk Southern Corp., in Norfolk, Va., for example, executives expect that saving from the decrease in diesel prices will be substantial. The bad news for Norfolk Southern is that some 35% to 40% of its freight is coal, and as oil prices have fallen, the volume of domestic coal traffic has begun to head downward.

Executives at oil-burning U.S. utilities, which supply about 5% of the country's electrical needs, are particularly gleeful these days. "It's been a long time since our fuel-contracting people have had so much fun," says Thomas Page, president of San Diego Gas & Electric, a utility with 900,000 customers. Until February, SDG&E consumed nothing but natural gas; then, with a few adjustments at its power plants, the company began burning oil from Alaska, Australia and Indonesia. Average cost of the new fuel: about $11 per bbl. SDG&E says it is now saving $500,000 to $1 million a month. Analyst Gregory Enholm of the Salomon Brothers investment banking firm estimates that utility rates in the West and the Northeast, where oil-burning facilities are most prevalent, will drop as much as 20% by summer.

Utilities, businesses, homeowners and others who still burn natural gas are winning lower costs as their fuel suppliers try to compete with oil. Consolidated Natural Gas of Pittsburgh says that its 1.5 million customers are already enjoying savings of up to 20%. If the price of petroleum keeps plunging, however, gas companies will be hard pressed to compete with fuel-oil dealers.

Farmers have a lot to gain from the oil-price slump. Agriculture absorbs 3% of all energy consumed in the U.S. each year--for diesel- and gasoline-powered machinery, for petroleum-based fertilizers and pesticides, and for pumps used to lift and distribute irrigation water. With spring planting on the way, the timing of the oil-price collapse is, from the farmer's point of view, well- nigh perfect. Diesel-fuel prices have dropped so far this year by anywhere from 23 cents to 30 cents per gal., to as low as 50 cents. Costs are expected to come down for the farmer's favorite fertilizer, anhydrous ammonia, to $165 per ton from last year's $192.

Earle Gavett, director of the Department of Agriculture's Energy Office, estimates that farmers will save $1.1 billion on gasoline and diesel fuel this year. The amount that individual farms will save, says Mike Pieschel, president of the Farmers & Merchants State Bank in Springfield, Minn., "is not by itself going to prevent any farmer from going under. But it sure as hell is going to have an impact" in reducing the cost squeeze for some growers. Salesmen of tractors and combines are less sanguine. Says Cletus Chappell, co-owner of C&W Equipment Co., of Jerseyville, Ill.: "The savings will be around $500 or so (per farm). It will help with the planting, but not in terms of helping to buy new equipment."

The country's office and apartment landlords and builders are clear winners. Robert Logan, president of the Syska & Hennessey mechanical- and electrical- engineering firm in Manhattan, estimates that many developers are saving up to $1 per sq. ft. in energy costs as a result of the petroglut. That is equal to anywhere from 25% to 50% of the total energy costs for many buildings. Residential home builders, who are enjoying the double benefit of lower interest rates and the oil-price cuts, are also feeling giddy. It did not seem coincidental that of the 20 biggest gainers on the New York Stock Exchange in the first quarter of this year, six were home builders.

One industry that has responded slowly to the oil-price drop appears to be the $80 billion petrochemical business. In Worcester, Mass., Robert Freelander, owner of Come Play Products, a toy firm, notes that the price of some of his plastic items will be the same this Christmas as last. The reason: "Manufacturers have not been given a reduction in the price of materials. Since December, the cost of polyethylene has gone up about 3 cents a lb." Executives at the floor-coverings division of Dan River Inc., in Greenville, S.C., are less than elated with the results of the oil-price drop. The fibers that the company uses come from such petrochemical giants as Du Pont and Monsanto. So far, says Frank Loftin, a Dan River marketing vice president, the prices of those materials have not dropped.

At least not yet. One reason for the delay, says Joseph Bereswill, a spokesman for Celanese Corp., the Manhattan-based petrochemical firm, is that "it takes time for lower oil prices to be reflected in the thousands of products derived from oil." Agrees Paul Christopherson, an analyst for Bear, Stearns, a Wall Street investment firm: "The price of the paraxylene that Celanese uses to make polyester has just begun to weaken. It takes a while for the market to figure out how far down derivative prices must go." For Detroit, the big question is how the oil-price decline will affect car-buying habits. Most industry experts do not expect a sharp shift toward big cars. They believe that the sticker price of a car, rather than how much it may cost to operate the auto, is what customers now think about most when they enter a showroom. Whatever models consumers choose to buy, they may spend more time behind the wheel because of cheap gas. Economists expect to see an increase in cross-country driving this summer, which will benefit businesses around vacation spots from Disney World to the Grand Canyon.

No expert can predict exactly how the oil-price savings will filter through the rich complexity of the U.S. econ omy. Many companies will lower prices; others will increase workers' salar ies; some will fatten their profits. Adroit managers will try to do all three. But there is no doubt about the net result: Americans will have more money in their pockets, and they will be able to find fresh ways to spend, invest and enjoy their newly recovered wealth, at least for now.

With reporting by Lee Griggs/Chicago and Raji Samghabadi/New York