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Gas Price Rise May Thwart Economic Recovery

Gas Price Rise May Thwart Economic RecoveryOne oil expert warns fuel could go from $3 to $5 a gallon by 2012.  Gas prices are spiking again, setting off new fears for the economy even as it heads toward recovery. Gasoline costs $3.13 a gallon in Metro Detroit and Michigan. This is up 23 cents from last month and 46 cents or 17 percent from a year ago. Said information is according to AAA Michigan. It’s the highest price in more than two years — since mid-October 2008.

The economic recovery could spark demand for oil worldwide, pushing it past $5 a gallon by 2012, former Shell Oil executive John Hofmeister said this week. While oil analysts and economists disagree with Hofmeister’s projection, they agree the price of gas will keep increasing. In addition, they also both agree that the buck won’t stop at the pump. Petroleum’s rising cost would push up the cost of consumer goods, commuting, and vacations.

The trend may not only cause drivers to buy smaller vehicles than they now own. But it eventually could threaten the economy.

If the price of gas continues to rise, some Metro Detroit drivers said they’ll cut back on driving and other expenses.

“I would probably spend less money on food,” said Lindsay Dymond, 17, of Livonia, who drives a Ford Focus.

Dymond got her driver’s license this year and uses to compare prices at local gas stations.

Others have already reduced their driving, working errands and grocery trips into their commutes home from work.

“I don’t go out anymore,” said Ken Yager, a plumber from Farmington. “I only drive when I have to.”

Yager spends close to $90 filling his truck. If gas gets more expensive, Yager said he may have to pass on the costs to his plumbing customers.

The increase leaves some consumers scratching their heads.

“I don’t know why (gas prices are rising),” said Robert A. Tyner of Detroit as he pumped his Chevy sedan with mid-grade gas at $3.23 a gallon. “I mean, has a refinery broken down somewhere? Was there a fire? It’s outrageous.”

The recovering worldwide economy and a weak dollar are driving the price of gas. This is especially since heavily populated economies like China and India demand more gas, analysts said.

David Littmann, a senior economist with the free-market Mackinac Center for Public Policy, worries the rising price eventually could tip the economy back into recession — much like the 1973-74 oil crisis did — because the cost gets too high.

Midland-based Dow Chemical Co. would see transportation costs increase, but wouldn’t see factory operation costs rise because of the low cost of natural gas, said Kyle Bandlow, a Dow spokesman unless the Obama administration allows more offshore drilling for oil to increase supply or the Federal Reserve backs off its monetary policy that is weakening the dollar and inflating oil prices, there could be a point where the rising price of gas trips up the economy, Littmann said.

Hofmeister, who heads a nonprofit in Houston, is urging the United States to ramp up domestic oil production.

At $5 a gallon, the country likely would intensify its interest in extracting the U.S. natural gas supply, said Dana Johnson, chief economist for Comerica Bank.

Rising gas prices could affect the auto industry.

Alec Gutierrez, a lead auto analyst at Kelley Blue Book, said his firm doesn’t believe gas prices will hit $5 a gallon by 2012. But even an increase to $3.50 a gallon would start changing some vehicle buying patterns, he said.

“You’ll see a lot of consumers shy away from large trucks,” Gutierrez said, adding that resale values may also drop for such vehicles. When gas spiked above $4 a gallon for many weeks during 2008, resale values on SUVs and trucks dropped 10 percent to 15 percent in less than a year, he said.

Sales of larger trucks and vehicles fell during the price spike in 2008. Sales of compact and subcompact cars shot up, accounting for about one-fourth of U.S. auto sales at the time, said Ivan Drury, a Santa Monica, a California-based analyst with, the car research website.

But the trend subsided when the price of gas fell.

Higher gas prices could be a mixed blessing for automakers, which are rushing more fuel-efficient cars to market ahead of increasingly stringent fuel economy standards, but typically make higher profits on large trucks and sport utility vehicles.

Consumers have been going big in their vehicle choices lately. Light truck sales, which include pickups, SUVs, and crossovers, have surpassed car sales for three months in a row this year starting in September.

Meanwhile, hybrid car sales are expected to be down 8.1 percent this year, and compact car sales up 1.1 percent, according to

“There weren’t many new players in the compact car segment to draw in attention and, because of the economy, many traditional compact car buyers likely bought used cars if they bought anything at all,” said Senior Analyst Michelle Krebs.

That could soon change as automakers ramp up their small car offerings in the next few years.

Higher gas prices will be crucial to making small and battery-powered cars more attractive to consumers, analysts say.

“Naturally, as gas prices go up, consumers do begin thinking about buying small cars,”’s Drury said.

“It was that $4 a gallon mark that really pushed people over the edge.”


Jaclyn Trop and Christina Rogers / The Detroit News


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