The Long Winter

It’s been a fairly quiet week in the energy sector the last seven days. Oil prices have stabilized at about $63.50 a barrel, +/- $2. I expected a stabilized price by this time but was hoping it would be under $60. This may be as good as we can do ever again.

As yet, this has not resulted in much impact on prices overall. Stephen King (not the horror-novel writer, another one) of The Independent in London explains why this is so. During past periods of oil price shocks, workers have compensated by fighting for (and winning) higher wages. To maintain profits, companies raised their selling prices, thereby driving up the inflation rate. But as we all know, the power of workers to obtain wage increases is largely gone. So with this oil price spike, most of the impact will fall on regular working people, and especially the working poor.

Mr. King’s point is entirely logical, but to me it is hardly the end of the story. If workers have the same amount of money and are forced to spend more of their money on gasoline for their cars, it follows that they will have less money to spend on other, less vital things. It then follows that the producers and sellers of these “other, less vital things” will eventually see their business fall to unsustainable levels and shut down, and increase the unemployment rate. So while this oil price shock may not result in much inflation, it seems unlikely that we will be able to avoid a recession.

Unfortunately, the high price of gasoline will not be the only thing that workers with their stagnant wages will have to deal with. They must also accommodate a huge increase in the price of natural gas and heating oil (our Department of Energy currently estimates an average of 47%, some say it will be even worse). This will affect not only the workers, but the organizations that employ them. They will have to pay to heat the places these workers work in, which will cut into their bottom lines. Do they raise prices to maintain healthy dividends for their stockholders, or will the nature of competition prevent this from happening? I don’t know, although I assume that if companies have not reacted with higher prices because of increased transportation costs, I don’t imagine they would do so for higher heating bills.

Of course, there are things that people and businesses can do to adjust to this new reality. The New York Times reported yesterday on some of the initiatives to install new heating systems, add insulation, or otherwise find a way to lower the thermostat. Cathy Proctor of the Denver Business Journal provides more interesting speculation on other ways that Government and businesses might respond to the situation – by shutting down for a while. Schools may shut down for a week in March, then make up the time in June when there is no need for heat. (This honestly seems strange to me – the time you could avoid using the most heat would be in January, so I propose that schools give their students an extra week off after the New Year and start on January 9, 2006). Workers may have to deal with factories temporarily shutting down and being briefly without income, which will make the bad situation even worse for them.

I have found that I am pretty lousy when it comes to predictions, but I have to imagine that people are going to be in a lot worse mood next March than they are now, especially the farther north they live.