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Eight ways $100-a-barrel oil may affect you

Even though plenty of oil is around, there is fear of further disruptions, and consumers, business people and politicians have all been making adjustments. Here’s how higher energy prices are starting to affect America.

In recent weeks, the price of a barrel of oil has stayed at about $100 a barrel, and gasoline prices have been edging closer to $4 a gallon. The costs are apparently the result of events half a world away, in the Middle East. Even though plenty of oil is around, there is fear of further disruptions, and consumers, business people and politicians have all been making adjustments. Here are eight ways that higher energy prices are starting to affect America.

1. Airplane travel: More costly, yes, but also crowded
If you’re at a computer trying to make plane reservations for the summer, you had better hold on to your seat: The prices might make you hit the ceiling.

Airlines have hiked fares six times since the beginning of the year because of the soaring price of jet fuel, says Rick Seaney, CEO of FareCompare.com.

Anyone flying to Europe this summer can expect to pay $1,400 to $1,800 round trip for a coach ticket. That cost includes about $400 for a fuel surcharge and another $120 in taxes and fees.

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“Historically, it is not unusual to see summer travel for a ticket over $1,000, but I’ve never seen in a decade prices in the $1,400-to-$1,500 range and higher on certain days,” says Seaney.

Domestic flights won’t be much better. Airlines have tacked on about $60 in fuel adjustments since January, Seaney estimates. According to his site in mid-March, a July round-trip flight from New York to Los Angeles is almost $600, up from an average of $333 last July.

Over the past year, the price of jet fuel has gone up by about $1 a gallon. For American Airlines, the added cost over the past year is about $2.5 billion, according to Edward Martelle, a spokesman in Dallas.

Another ramification of the rising fuel prices: Flights will remain crowded. Some airlines are reducing their number of flights because they can’t recoup rising costs fast enough. American Airlines, Martelle says, had planned to add 3.4 percent more flights to its system this year. Now, it will add only 3 percent.

2. Driving: Staying local — and scrimping upon arrival
On long weekends, Maggie and Anthony Chisum usually pack up their Jeep Grand Cherokee in Tustin, Calif., and visit relatives in Bullhead City, Ariz. But this Memorial Day, the couple may not make the 4-1/2-hour drive. With gasoline at close to $4 a gallon where they live, it costs almost $80 to tank up their vehicle.

“It’s a big, expensive weekend just to visit family,” says Maggie Chisum. “We’re probably just going to do something locally.”

The Chisums’ decision to cut down on their driving shows how higher gas prices are starting to create subtle shifts in consumer behavior.

“It’s one of the hidden impacts — someone not visiting relatives, or not driving to the mall or combining trips,” says John Silvia, chief economist at Wells Fargo Securities in Charlotte, N.C.

The price at the pump is one of those economic events that most people notice. At Maggie Chisum’s last fill-up, for example, she knows she paid $3.91 a gallon. At the least, almost every driver knows if he or she is getting fewer gallons for a $20 bill.

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The rising prices can change daily behavior. For example, consumers tend to top off their tanks more frequently if they think the price will go up soon. Also, many motorists will search for the gas station with the lowest prices in their area.

“People will do more to save a penny a gallon as the price is rising,” says Jeff Lenard, a vice president at the National Association of Convenience Stores in Alexandria, Va. “I know; I do it myself.”

While higher fuel prices may not stop many families from taking a trip this summer, they may scrimp when they arrive at their destination, says Troy Green, a spokesman for the AAA.

“They might stay at a cheaper hotel or use cheaper restaurants,” he says. “Or, instead of driving from New York to Washington, D.C., they might go to Philadelphia instead.”

When gasoline prices hit $4 a gallon in 2008, many resorts awarded travelers gas cards to defray costs. That’s already starting to happen again. For example, in Carlsbad, Calif., the West Inn & Suites, a boutique hotel, is giving travelers an “On the Road Again” package that includes a $25 gift card for the inn’s own gas station.

3. Food costs rise, and corn demand is one culprit
Chicken, beef and pork are all getting more expensive. And some of this increase can be directly traced to higher energy prices.Federal law mandates the use of an increasing amount of ethanol to be blended with gasoline. This is the main driver for the rising demand for corn, which can be used to make ethanol, says Bill Lapp, a food economist at Advanced Economic Solutions in Omaha, Neb.

“As the amount of corn used to make ethanol rises, that ultimately increases demand and thus raises the price for corn,” he says.

As the price of corn rises, there is a ripple effect on the cost of beef, chicken, and pork, because corn is also used for feed, says Lapp.

If farmers increase their acreage of corn to take advantage of higher prices, that potentially reduces the acreage they devote to other food commodities, such as wheat, rice and soybeans. This can increase the prices of these crops.

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Once foodstuffs leave the farm to head for market, it’s also more expensive, since much of it travels by truck. Moving a truckload of beef from Omaha to New York, a distance of about 1,250 miles, costs an extra $361 if the trucker gets seven miles to the gallon.

Farmers are dealing with higher energy costs in other ways. Like many others, they have to buy petroleum-based products — which cuts into their profits.

Diesel prices are now $1 a gallon higher than a year ago.

“We use diesel for almost everything we do, whether it’s planting the crop or spreading fertilizer or harvesting,” says farmer Jamie Derr of Marshall, Wis., who is also president of Solarmass. “The rising energy price cuts into your margin.” He has planted a field of pennycress, which he will make into biodiesel to run his farm equipment and — he hopes — cut down on his rising fuel costs.

The fertilizer used by many farmers requires a significant amount of energy to produce, and that has been partly responsible for an increase in fertilizer prices. According to AgFax.com, an agriculture news source, the price of starter fertilizer, which is applied at the time the seed is planted, is up 78 percent, compared with last March.

Derr says the price of the fertilizer he uses is up 40 percent since August. To control his costs, he is working with an adjacent dairy to buy manure to spread on his crops this planting season.

4. Car buying: Will it turn the market upside down?
Bill Pierce unfurls a gray stripe from its backing and presses it against the fender of a black Dodge Charger at a car dealership in Mobile, Ala. As a self-employed auto detailer, he’s worried about what he’s hearing from industry insiders — among other things, gas prices perhaps as high as $5 a gallon this summer. “It’s going to kill the car business and kill my stripe business,” he says.

No doubt about it, the price of gasoline is starting to make a difference in Americans’ car-buying decisions.

More than half of consumers say a gas price of $3.50 a gallon would affect their next vehicle choice, and at $5 per gallon, 95 percent say it would definitely be a factor, says Jack Nerad, a market analyst for Kelley Blue Book, an auto pricing firm in Irvine, Calif.

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With gasoline prices close to $4 a gallon in some places, some Americans appear to be making a shift. Hybrid sales soared by 39 percent in February, compared with the same month last year. The bestselling hybrid, the Toyota Prius, saw sales rise by 70 percent.

But will those gains continue?

Even when gas prices are elevated for extended periods, hybrids usually don’t inspire mass sales — the biggest detriment being cost. “People will say, ‘Yes, I would consider a hybrid,’ but when they’re actually forced to put their money down, that’s when the rubber meets the road,” says Nerad.

Availability might become another factor. In the wake of the Japanese earthquake and tsunami, Toyota has suspended production of the Prius.

Competition is yet another factor. These days, consumers have a wide variety of choices, and conventional, gasoline-powered engines are improving every year in terms of fuel economy. Some now get 40 miles per gallon for highway driving.

According to the latest Kelley figures, 42 percent of consumers researching new cars intend to swap for a smaller engine size, and 40 percent are considering switching to a smaller vehicle altogether.

Yet Americans still like big vehicles. Pierce says no matter how high gas prices go, he’d never trade his Toyota Sienna minivan or his Toyota 4Runner SUV for an electric car or hybrid. “It just takes too many years to recoup the expense,” he says.

5. ‘Free shipping’ not so free
Don’t be surprised if your favorite e-retailer tries to persuade you to have your purchase shipped by ground instead of air.

That’s because almost all the major shippers, except for the U.S. Postal Service, are now adding a fuel surcharge. So far, most e-retailers have absorbed the cost, although they’re going with cheaper shipping options when possible.

“It’s almost a requirement [for e-retailers] to offer free shipping,” says Doug Caldwell, vice president at ShipSweet.com, a shipping company based in Seattle.

But indeed, that “free shipping” is getting increasingly expensive. This month, both FedEx and the United Parcel Service tacked on an additional 11 percent for express delivery and 6.5 percent for ground.

To educate his customers, Steven Drollinger of Dogwood Ceramic Supply in Gulfport, Miss., wrote a long explanation of the current fuel surcharge rates. Dogwood is passing along such charges to buyers.

“I was getting calls from customers who were freaked out,” he says. “They were saying, ‘What do you mean it’s up $10? It was $100 last month!’ It’s hard for people to grasp it could trickle down to everything they buy.”

Look for that trickle-down to increase, says Caldwell. Because fuel surcharges lag, he says, they will rise closer to 25 percent by May.

6. Renewable energy: Not as big a boost as you’d think
Do high prices for oil help in the development of alternative renewable fuels, such as solar, wind, and bio- fuels?

Yes and no.

The market for corn ethanol is benefiting because it is now considerably less expensive than gasoline. But wind and solar power are used principally to generate electricity, which means they compete more with coal and natural gas than with oil.

Still, a jump in gas prices gets Americans — and their elected officials — thinking about the need for alternative fuels, says Nathanael Greene, director of renewable energy policy at the Natural Resources Defense Council in New York.

“There’s a psychological effect that’s clearly impacting Washington, D.C., and will trickle out more broadly the longer [high] prices are sustained across the country,” he says.

In the short term, that pressure “may be enough to extend some of the really critical [alternative energy] incentives that we have, especially at the federal level right now.” He adds, “The federal government took some really important measures as part of the stimulus bill to help renewables through the recession.”

What’s holding back alternative fuels is the weak demand for electricity, says Rob Gramlich, senior vice president for public policy at the American Wind Energy Association in Washington. “It’s down currently,” he says. “That’s one of the challenges renewable sources like wind have right now. Utilities are sort of waiting and seeing what the future is going to look like.”

That future could be one of much greater demand for electricity. As more electric-powered vehicles hit U.S. roads, Mr. Gramlich says, wind-generated electricity will compete more directly with oil as a vehicle “fuel.”

Nuclear energy is also considered an alternative energy source, but its future is murkier than ever in light of events in Japan.

7. More political friction
If oil prices remain high, the airwaves will become increasingly filled with politicians blaming one another for the rising costs.

The GOP and the American Petroleum Institute, which represents the oil industry, say President Obama is at fault for halting new drilling in the Gulf of Mexico after the BP oil spill. Senate Republican leader Mitch McConnell of Kentucky claims that some in the Obama administration “are actively working to prevent us from increasing our own oil production here at home.”

Obama rejects those arguments, maintaining that U.S. production of oil is at the highest level since 2003 and includes record output in the Gulf. “So any notion that my administration has shut down oil production might make for a good political sound bite, but it doesn’t match up with reality,” Obama said March 11.

On the issue of Libya, some GOP politicians criticized Obama in early and mid-March for what they saw as a hesitant U.S. stance. However, on March 18, after a United Nations resolution backing action, European nations and the United States began taking steps to enforce a no-fly zone.

Other politicians point fingers at speculators. Sen. Bill Nelson (D) of Florida wants federal regulators to raise margin requirements for buying oil-futures contracts. He cites economist Edward Yardeni as noting that large speculators had increased their holdings by 89.7 percent in a recent five-week period. But Yardeni also believes that once the dust settles in the Middle East, gas prices will fall.

8. A softer global economy
One need look no further than the recent recession to see how the global economy affected the U.S. economy, and vice versa. Oil can be a big link in this interconnectivity.

“If you look at the concern about uprisings in the Middle East and spreading into the Persian Gulf, and if Libyan exports are out for an extended period of time, $100 a barrel looks sustainable,” says Sarah Emerson, president of Energy Security Analysis Inc. (ESAI) in Wakefield, Mass.

As a result of oil at about $100 a barrel, the world economy has a hitch in its step. But it’s unlikely to trip and fall unless prices go much higher.

How much higher? Oil prices above $120 a barrel begin to have negative effects on the world economy, says Mohsin Khan, a senior fellow at the Peterson Institute for International Economics in Washington.

If the price spurts to $140 a barrel, some estimate it would drive the world economy back into recession, Khan says.

“It impacts the economy in two ways: reducing growth and increasing inflation,” he says.

In the United States, every $1 increase in the price of a gallon of gas adds $1,000 to a household’s annual expenses, says Sara Johnson, senior research director of global economics at IHS Global In­sight in Lexington, Mass. Over the past 12 months, the price is up 77 cents.

But in some countries, the impact is less clear-cut, Ms. Johnson says.

“In many of the populous countries, governments put ceilings on energy prices and then provide a subsidy to protect consumers from bearing the full impact of a price shock,” she says.

Among the countries doing this are India, China, some Middle East nations and a few in Latin America. Still, some nations are concerned with the rising prices. Spain, for one, recently reduced its highway speed limit from 75 miles per hour to 68.