Consumers face long-term energy price squeeze

WASHINGTON (Reuters) - Consumers look set to face an enduring squeeze from high energy prices as growing global demand pushes oil prices to record highs, raising winter heating bills and the cost of gasoline.

Oil hit a record high above $98 a barrel on Wednesday. Adjusted for inflation, that is just a touch below the $101.70 peak of April 1980 -- but it is high enough for Americans to feel the pinch.

"It's uncharted territory. We're hitting prices that are behaving in a way that we haven't seen in recent memory," said Bill Cheney, chief economist at John Hancock Financial Services in Boston.

The rise in crude prices has squeezed profit margins at U.S. refineries, but a jump in gasoline prices last week showed consumers starting to bear more of the burden.

Gasoline prices shot up by 14.1 cents to $3.01 a gallon over the past week, the highest since mid-July, the government said on Monday. On Tuesday, it said gasoline will likely average $3.02 a gallon in 2008, up from $2.84 this year.

Adding to that, consumers will spend far more this year than last to heat their homes. Consumers are expected to spend about 26 percent more this year on heating oil and 10 percent more on natural gas, the U.S. Energy Department said.

According to Richard DeKaser, chief economist at National City Corp in Cleveland, rising energy and food prices will impose the equivalent of a 1.2 percent tax on consumers this year, the highest since 1979 but well below the 2.4 percent "tax burden" seen that year.

"The most important issue in terms of its impact is its persistence," DeKaser said of rising oil prices. "If we stay in the mid 90s (range per barrel) for months to come, this will impose a heavy tax on consumers, especially those with low and moderate incomes."

CRIMPING DEMAND

Unfortunately for U.S. consumers, many analysts are warning that these heightened prices are unlikely to prove fleeting.

"Our outlook, certainly on the crude side, is that prices will continue to rise until you find a level that crimps global demand," said J. Marshall Adkins, director of energy research at Raymond James & Associates.

So far, world oil demand has remained strong, supported by a drop in the value of the U.S. dollar that has made oil, which is priced in dollars, less expensive for consumers overseas.

The Energy Department said on Tuesday that global demand growth will be 40,000 barrels per day higher in both the fourth quarter of this year and the first quarter of 2008 than it had previously thought.

"A lot of it depends on what the dollar does," said Adkins, noting that a weaker greenback can give a lift to foreign consumption.

So far, U.S. consumer spending has held up.

According to the government's latest estimates, consumer spending grew at a 3 percent annualized rate in the three months ended in September, in line with the average seen since the housing market peaked in the third quarter of 2005.

Some analysts, however, warn that rising energy costs could prove a breaking point for an economy already struggling through a housing recession.

TIPPING POINT?

"With the U.S. economy at a tipping point, a 14-cent jump in gasoline over a single week signals a spike that will empty consumers' pockets during the holiday season," said Judy Dugan, research direction for the Foundation for Taxpayer and Consumer Rights in Washington, a non-profit consumer watchdog group,

"It's not hard to imagine $4.00 a gallon early next year."

John Hancock's Cheney, however, predicts that U.S. consumers will keep up their spending. "The record for American consumers is that we spend through thick or thin," he said.

While many consumers may be faring OK, lower-income Americans will definitely be hard hit.

"Those in the lower-end are going to be hurt and have been hurt by the inflation that we've seen in food and energy, and also this debacle we've seen in the subprime (mortgage) market," said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut.

Even so, a cutback in spending from lower-income families is not likely to drag down U.S. economic growth much, since the bottom 20 percent of the income bracket accounts for only about 8 percent of total consumer spending, he said.

"I don't see that putting us in recession, but there definitely is going to be some pain for the discount retailers," said Darda.

(Additional reporting by Tom Doggett)