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VOL. 126 | NO. 105 | Monday, May 30, 2011

No Octane

Despite recent drop, high gas prices threaten recovery

By Andy Meek

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Several of Memphis’ major publicly traded companies pointed to it during calls with analysts and presentations of their first quarter results.

An expected drop in automobile travel during the Memorial Day holiday weekend in Tennessee and neighboring states is expected to be influenced by it.

It’s offsetting the higher paychecks workers are getting this year thanks to a temporary payroll tax cut.

Many consumers are feeling a pinch from rising gas prices, forcing them to curtail their driving habits. Although it has fallen slightly in recent days, the high cost of gas is jeopardizing the nation’s economic turnaround. This phenomenon will be painstakingly clear this Memorial Day weekend – the busiest travel period of the year.

(Photo: Lance Murphey)

And in a worst-case scenario, it could suck the wind out of the sails of the still sputtering economy.

The factor behind all those patterns is the price at the gas pump, which has led to a seesaw array of “it’s up” then “it’s down” news stories from one day to the next.

One day, the headline reflects how gas prices are up 30 percent so far this year. The next, it’s that gas prices are down a few cents in Memphis and Tennessee.

In some respects, it’s a complicated trend to dissect. Gas prices have indeed eased somewhat over the past few weeks.

The price of a gallon in the U.S. has dropped about 9 cents nationwide in the past two weeks as of press time, according to a national study cited by The Associated Press.

But not only are consumers not feeling better off because of that drop, the high prices that appear to be staying put are slowly starting to have a more constant effect on consumer-driven companies and economists who are baking the high prices into their forecasts.

Gas prices are up on average about 30 percent from 12 months ago and as much as a dollar higher in Tennessee than they were this time last year. The current average price of a gallon of gas in Tennessee is about $3.68, up from $2.68 this time last year, according to the AAA Auto Club South.

The current average price in Tennessee is pretty much the same as it was one month ago. It’s down about 10 cents from last week.

The effect of that steady climb over the past year has already seeped into many aspects of the consumer economy – whether consumers realize it or not, and irrespective of small drops in price here and there.

To understand how higher oil prices drive up the price of everything from airfare to food, consider that earlier this month, the world’s largest retailer said sales at U.S. stores open for at least a year dropped for the eighth straight quarter.

Bill Simon, president and CEO of Wal-Mart Stores Inc.’s U.S. operations, said fuel prices are increasingly keeping customers away from the retail giant’s stores.

The same thing goes for home improvement chain Lowe’s, which said customer traffic was down 3.4 percent in the first quarter. CEO Robert Niblock told analysts during the quarterly results conference call that homeowners mention rising gas and energy prices as the main factor behind their spending plans.

Timothy Nicholls, chief financial officer of Memphis-based International Paper, told analysts during his company’s Q1 earnings conference call that IP has “seen higher freight and higher fuel cost that hit margins in the first quarter.”

That trend also was noticeable at Memphis-based Pinnacle Airlines Corp. Pinnacle chief financial officer Peter Hunt told analysts on the Q1 call “we did have a pretty big hike on fuel costs. Fuel costs increased $1.3 million year over year, and the average price we paid per gallon was $3.16 in the quarter, which was up 32 percent from the first quarter of 2010.”

Alan Graf, the chief financial officer of Memphis-based FedEx Corp., told analysts during his company’s Q1 (fiscal Q3) presentation that “earnings could be affected by the impact of the ongoing political turmoil in the Middle East and North Africa on fuel prices and the economy in general.”

More than two-thirds of 23 economists surveyed by CNNMoney pointed to the high price of oil as the biggest headache facing the U.S. economy right now.

When Dunavant Enterprises CEO and president William Dunavant III asked for a show of hands when he made a presentation in March to the Traffic Club of Memphis about whether gas would ever fall back to around $2 a gallon, no hands went up in response to his question.

But plenty of hands went up when he asked who thought it might go the other way and approach $5.

Perception is behind some of the effects of the pain at the pump. Several forecasts, for example, point to gas prices slipping a little bit in the coming weeks and months.

“We expect fuel prices will start to moderate in the third quarter, in part because emerging market demand will fall as tightening begins to tame too-fast economic growth, and in part because the U.S. consumer will be so badly squeezed by then,” Lindsey Piegza, economist with FTN Financial, a unit of First Tennessee Bank, said in one of her recent weekly economic analysis reports.

“Both will further reduce demand. This will allow consumer spending to slowly recover, but not before GDP growth slows to 1.5 percent by the fourth quarter. (Gasoline futures tumbled this week, but we do not expect them to stay down just yet. Seasonal pressures are just too powerful at this time of year.)”

Jessica Brady, media relations manager for AAA Auto Club South, said gas prices have been steady in Tennessee and Memphis for at least two weeks.

“It’s likely this summer prices could range between $3.25 and $3.75, barring any catastrophic event such as a bad hurricane,” she said. “Retail gas prices are projected to decrease over the next couple of days and hopefully throughout the end of the month. Now that there has been two consecutive weeks of crude oil trading below $100 a barrel, consumers should start to see gas prices drop – albeit a very slow and steady decline.”

Bad weather already has pounded the Memphis area and much of the rest of the South this year.

Exxon Mobil Corp. shut down its terminal in Memphis south of the Interstate 55 bridge in April. Bill Day, executive director of media relations for Valero Energy Corp., said production at Valero’s Memphis refinery was not disrupted by the recent storms and flooding but that a few product terminals were closed and barge traffic was interrupted, putting kinks in the logistics of Valero getting gas and diesel to market.

As the floodwaters began to recede, Day said Valero was still assessing what the impact would be.

What’s clear is that the consequences of gas price fluctuation don’t travel in a straight trajectory.

FTN Financial chief economist Chris Low said earlier this month that a widespread, broadly felt sea change in consumer spending patterns wouldn’t happen until prices hit something like the $5 mark. At the same time, he said gas prices consumers have been forced to shoulder since the beginning of the year are still painful and produce negative effects now.

“We will see gas prices, not falling, but probably not rising all the way to $5 or $6, which is where you have to start worrying about a slowdown in the near future,” he said.

It may be still too early to get a broad sense of what the effect of the current price levels are. The AAA, for example, is predicting almost no change in overall travel during the Memorial Day holiday weekend this year, and only a small drop in automobile travel during the weekend in what the AAA refers to as the East South Central region, a four-state area that includes Tennessee.

In some cases, the decision is being made to bite the bullet and eat the high price at the pump – for now.

Consider Metropolitan Bank. It has co-headquarters in Memphis and Ridgeland, Miss., two cities that are about 200 miles apart. When possible, company officials try to carpool between both cities to cut down on the travel expense, but they haven’t dramatically pulled in the reins on travel because of the price alone, saying the trips are just too important.

“While I might like to tell you that we have cut back on travel between offices due to the rise in gas prices, the truth is the inter-office travel is so important to the culture and climate that we try to maintain, we really cannot allow it to reduce these important trips,” said Josh Huff, Metropolitan’s marketing director. “Being co-headquartered in Memphis and Ridgeland, it is important that our senior management maintain a presence in both markets.

“While we have, and utilize well, a video conference system that probably cuts down on some travel, the reality is that the two markets are very different, and the only way to truly understand those differences, and be able to serve each market effectively, is to have a presence there. Our CEO, Curt Gabardi, splits time equally in both markets, and myself, our COO (chief operating officer), and our chief credit officer are in both markets on a weekly basis in most cases.”

It remains to be seen how much longer the status quo can continue if gas prices keep creeping higher. The AAA says gas prices are up 41 percent in 2011 in the East South Central region alone. If prices continue to climb, it could have a profound effect on the economy in the coming months.

“In the wake of $4 a gallon gasoline, consumers have been forced to curb discretionary spending and reallocate funds toward gasoline,” Piegza said in her report. “The end result is the same amount of dollars spent for fewer goods purchased, which is not a recipe for growth. From a GDP and jobs creation standpoint, it’s not about how many dollars are spent, it’s about how much those dollars buy.”

PROPERTY SALES 83 405 4,276
MORTGAGES 104 424 4,814
BUILDING PERMITS 148 883 10,151
BANKRUPTCIES 53 264 3,149