Effects of gas prices on the economy

SPENDING | GAS PRICES have been picking up speed since the beginning of the year, and they won't be topping off any time soon.

DON'T CANCEL your vacation reservations, but brace yourself. "Drivers may be in for a bit of a surprise at the gas pump going into summer," when prices traditionally go up anyway, says Chris Stavros, senior oil analyst for PaineWebber. The cost of a gallon of gas has been rising roughly 3 cents a week since late January and doesn't show any signs of letup.

Oil-producing nations are expected to boost their output in the next few months, but it may be too little, too late to bring down prices in time for summer excursions to the beach or the mountains. "We could see gasoline at $2 per gallon in some regions of the country," says Stavros. Even at today's prices, filling up a Ford Explorer's 21-gallon tank with regular unleaded fuel costs $14 more than it did a year ago.

Once OPEC opens the tap, the effect may be slow to trickle down. "Gasoline prices have historically been fluid on the upside and sticky on the downside," says Robert MacIntosh, chief economist for Eaton Vance Management.

While a handful of airlines, led by Continental, have tacked on fuel surcharges to ticket prices, other consumer-goods companies are having trouble passing along price hikes. Nevertheless, we may see more widespread effects of higher oil prices in the next few months. "An airline might say, `We won't run this route at a loss anymore,'" says Bill O'Grady, energy-futures analyst for A.G. Edwards.

There's a limit to how much consumers can cut back on fuel consumption because most gasoline is used for commuting to work and household errands rather than leisure-time activities. Besides, says Stavros, "driving is still the cheapest alternative."

As long as the economy remains strong and household incomes keep rising, consumers will grudgingly fork over a few dollars more at the pump. And current price hikes look modest compared with what many drivers remember From the early '80s. The price of a barrel of oil would have to double to match the level it reached 20 years ago, adjusted for inflation. As a result, Congress isn't likely to reduce the federal excise tax on a gallon of gas by 4.3 cents, as some members have advocated (federal and state taxes account for about 40 cents of the price per gallon).

And automakers aren't too worried about a fall-off in sales of gas-thirsty sport utility vehicles. In fact, Chevrolet's lineup of new models for 2001 will include the Avalanche, a five-seat Suburban with the hauling capacity of a full-size pickup truck. Because today's cars last longer, "it takes five to six years of high gas prices to see an impact" on the kinds of vehicles consumers buy, says O'Grady.