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The Complex Effect of Fuel Prices

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  1. Consumers: The Tax-Cut Effect
  2. Farmers: Cheaper Operations Doesn’t Mean Cheaper Veggies
  3. Drivers: Hedging Against Volatility
  4. Retailers: Fuel Prices a Small Factor in Broad Economic Growth

Fifteen years ago and 1,000 miles away, a geologist named Richard Findley discovered the Elm Coulee oil field, a rich deposit of shale oil in the Bakken formation that straddles the Montana-North Dakota border. The discovery would eventually popularize hydraulic fracturing and make the United States the world’s largest producer of crude oil. Three years ago, President Barack Obama’s administration finalized standards that would raise the average fuel economy of cars and light trucks to 54.5 miles per gallon by 2025. And last year, China’s gross domestic product grew 7.4 percent, the slowest growth the world’s largest nation has seen in 24 years.

These elements – though disparate in time and geography – yielded a tangible effect on all of us: lower fuel prices. Thanks to the fracking that opened up the Bakken shale reserves, American oil rigs were pumping out 9.1 million barrels of oil a day in the last quarter of 2014, up from 3.8 million in the third quarter of 2008. Because OPEC nations didn’t curtail production, the market flooded with crude. Combine that with China’s slowing economic growth and more fuel-efficient vehicles, and fuel prices in January hit the lowest level in the United States since April 2009. Prices have since risen, but remain significantly lower than a year prior, and experts predict they should remain relatively low throughout 2015.

The price of gasoline can be viewed as an affect-effect hourglass. On one end is the wide array of global events that converges on the waist that is crude oil. Through that waist is another expansive chamber of industries and people dealing with the effects of the volatile commodity.

In some areas of the U.S., the dip in oil prices has obvious effects — small oil producers in North Dakota shut down rigs, Montana’s government scrambles for revenue, margins improve at Houston refineries. But here on the Eastside, fuel prices have a subtler and more nuanced effect on the economy.

Consumers: The Tax-Cut Effect

Charles Atkins smiles and chuckles. “Wow, it’s a big difference,” the Renton resident says of the gas prices at Fred Meyer in Renton, which on this early February day are $1.83 a gallon. He has three cars to fill with gas – one apiece for himself, his wife, and his son, all of whom work in Seattle and spend a good portion of their time driving. “I don’t really add it up … but I’d guess I’m saving at least $300 a month on gas.”

Graphic by Mike Forbush

Graphic by Mike Forbush

Atkins, a 57-year-old merchant mariner with Overseas Shipholding Group, says much of the savings he has enjoyed on gasoline have gone toward paying bills. But he’s also loosened his spending belt, particularly on gasoline itself. When prices were high, he says, the family would opt for public transit rather than $4-plus gasoline. “Sometimes we just had to park one car because we didn’t have enough money to put gas in it,” he says.

If Atkins was saving $300 a month on gasoline, he was on the high end of those reaping benefits from the plunge in fuel prices. Nevertheless, the projected savings for all Americans are significant. Though fuel prices have risen significantly from their January trough, the Energy Information Administration estimates fuel prices will average $2.33 a gallon this year and Americans will spend on average $750 less on fuel in 2015 than they did in 2014.

“Some economists have talked about gas prices this low as being the equivalent of a tax cut, so you can think about these prices as the equivalent of a $75 billion to $100 billion tax cut for U.S. consumers,” says King County Chief Economist David Reich.

That $750 affects each person differently. According to the Bureau of Labor Statistics’ latest Consumer Expenditure Survey, the middle quintile of earners — those making between roughly $35,000 and $75,000 a year — spent 6.2 percent of their income on gasoline in 2013. Those making between $18,000 and $35,000, the next lowest quintile, spent 5.7 percent of their income on fuel. The richest 20 percent of Americans, those making more than $95,000 a year, spent 4.1 percent of their income on fuel, the lowest by a full percentage point.

There are multiple reasons lower-middle-class working families benefit most from cheap gas. First, car ownership is costly enough — AAA estimates $9,122 a year, on average — to prevent the lowest-income families from driving much or owning vehicles at all. Wealthy people make enough money to either live near their workplace or insulate themselves from the effects of fuel prices. But the middle ground — those who likely own a car and must use it to drive to work — is where those who benefit most from low fuel prices fall.

But spend time at a fuel pump, and the only complaints you hear are from Exxon shareholders. Among those enjoying the savings are retirees, who get a little wiggle room in their fixed incomes.

“This just helps me to use the money for something else,” says Scott Lee, a retired chef filling up at the Renton Fred Meyer’s fuel center. “But I still spend it — more on groceries. Gas prices are down, but groceries are still up.”

“It’s made a huge difference, and I’m hoping it stays this way,” says Elizabeth Stroh, a stay-at-home mom with four kids. “Going out is a lot easier to do. It’s totally affected us because we have two cars and (my husband and I) both drive a lot.”

Stroh hasn’t saved her extra money. “I feel like the money’s there, so we’re just using it.”

The effects on everyone are different, and where the savings are spent fluctuates, but one thing is ubiquitous — hardly anyone is wishing the $4 gas would come back.


Farmers: Cheaper Operations Doesn’t Mean Cheaper Veggies

To understand the effect of fuel prices on the economy, sometimes it helps to look big. While the average Bothell-to-Bellevue commuter may celebrate saving $20 on gas every two weeks, there are those whose pocketbooks are affected in a much larger way. Aaron Golladay is one of them.

“My farm is big enough where I have about 50,000 gallons worth of (fuel) storage on the farm,” Golladay says, and when prices were at their lowest in January, “we filled up.”

Golladay owns Stokrose Farms, a 4,000-acre grain and alfalfa farm in Warden, southeast of Moses Lake. Like many farms of its size, Stokrose buys fuel in bulk — Golladay says the diesel he purchased in January for more than $100,000 should last half the year.


Meredith Molli, owner of Goose and Gander Farm in Carnation, at the Columbia City farmers market in 2014. Photo courtesy Goose and Gander Farm. Top photo courtesy Present Tense Farm.

The large farms in Eastern Washington and the Skagit Valley require huge amounts of fuel, so purchasing in bulk when the prices are low is a cost-effective move. Scott Dilley, Washington State Farm Bureau’s government affairs director, says fuel is a farmer’s second-largest expense after labor. But on the Eastside, smaller farms don’t have the capacity to store fuel the same was Stokrose does, nor do many of them need to.

Drive Fall City-Carnation Road and you’ll see the new age of agriculture in practice. Lining the highway are small farms producing organic dairy and fresh vegetables, much of which ends up in farmers markets and restaurants in the Seattle metro area. These folks aren’t shipping hay to feedlots in China; rather, they’re shuttling seasonal produce in vans to community-supported-agriculture (CSA) subscribers.

There’s a common philosophy in this organic corridor: farm small, and keep the food close. This approach doesn’t allow for thousand-acre plots like Golladay’s, but one fringe benefit is that fuel prices aren’t as significant a variable.

“We basically sell everything we grow within 30 miles,” says Neil Subhash, co-owner of Present Tense Farm, a 4-acre plot in Carnation. “We’re not shipping it across country or anything. The bulk of our fuel use is our delivery trips to Seattle, which takes place about three times a week. It certainly adds up, but it isn’t prohibitive to us.”

Shipping costs factor into any farmer’s margins — Subhash says fuel typically accounts for less than 10 percent of Present Tense’s expenses — so that’s one reason local farmers are hoping fuel prices stay low. If gas prices remain low once harvest season comes around, getting products to CSA customers and farmers markets won’t be as expensive, thus improving the bottom line.

“Our margins are really small, so any place where we can save money definitely helps our business,” says Meredith Molli, who operates Goose and Gander Farm in Carnation and is an owner of the Italian eatery La Medusa in Seattle. “We made a lot more restaurant deliveries last year, so that’s where it helps. When you’re driving a van that gets eight miles per gallon, you feel it.”


Graphic by Mike Forbush.

Local farmers’ low fuel usage means prices at farmers markets won’t fluctuate much, but grocery stores also have been slow to adjust their prices. Fuel and grain commodity prices typically correlate — corn is trading at $3.86 per bushel, about a third what it was in 2012 — but because of the volatility of commodity prices, a lasting trend usually has to occur before grocers sell Golladay’s corn at a lower price. So if fuel prices remain relatively low as analysts expect, grocers could eventually drop food prices, which would be a second benefit for consumers already saving at the pump.

But at Stokrose Farms, a long-term dip in fuel prices isn’t welcome if it helps trigger a sustained dip in grain prices. “Right now, corn is selling at about a break-even point,” Golladay says. His sentiment highlights the dueling nature of farming scales. Large farms can purchase fuel in bulk to insulate them from volatile price changes, but their products are closely tied to commodity markets that affect fuel costs. Meanwhile, small farmers like those in Carnation can watch the markets go wild, knowing they only have to pay for the fuel to deliver artisanal cheese and organic vegetables to their neighbors.

Drivers: Hedging Against Volatility

Tony Cristobal is hard on vehicles. His current fleet is a cargo van and a Chevy Cavalier. Each vehicle has been driven harder than a Pony Express horse; the Cavalier has 620,000 miles on it, and Cristobal still calls on the steed. “I donate a lot of vehicles,” he says, “because once I’m done with them, they usually aren’t worth anything.”

Independent couriers like Tony Cristobal rely on fuel surcharges to insulate them from the volatility of fluctuating prices. Photo by Julia Sumpter.

Independent couriers like Tony Cristobal rely on fuel surcharges to insulate them from the volatility of fluctuating prices. Photos by Julia Sumpter.

Cristobal is an independent courier who contracts with Delivery Express in Renton. He spends 10-12 hours a day in his car, running routes for Group Health and Incyte, a medical lab. He’s paid a flat fee for shuttling medicines and devices all day, so any dip in fuel prices improves his margins. To a point.

“When it’s below the baseline, I want it to be as low as it can go,” he says. “But once it gets above the baseline, I more than recoup my costs.”

Simply, the baseline is a fuel price on which couriers calculate surcharges, but on a larger scale it’s a microcosm of how industries that involve a lot of driving treat the volatile commodity. Delivery Express calculates its baseline using a five-year running average of weekly fuel prices. A move that’s necessary because fuel prices can swing dramatically. If they swing lower over a few months, as they have since September, couriers have smaller expenses. But if those swings happen in the other direction, companies who make their living with gasoline need to shift some of the cost and risk to customers.

Along with some route work, Delivery Express coordinates 400-600 on-demand deliveries daily from its Renton headquarters. That’s where company president Dave Hamilton and his 18 employees huddle over computer screens, taking orders, and lining them up with their 100 contracted drivers.

Drivers’ ability to keep constantly shifting margins in the black affects the price they command from Delivery Express, and what Delivery Express then must charge its customers. But shipping prices can’t change daily with fuel prices, so the baseline and a fuel surcharge come into play.

It works like this: Delivery Express calculates its baseline based on the five-year average price of fuel,  which was $3.36 a gallon at press time. If fuel is retailing below the baseline price, then customers don’t have to pay a surcharge, and drivers’ costs fluctuate with the price of fuel. But once the price of fuel goes above the baseline, a surcharge is put into play. Every time fuel prices rise a nickel, the surcharge jumps by 0.5 percent for gas-burning couriers and 0.75 percent for diesel freight vehicles. The current baseline is $3.36 a gallon. “We’re not expecting any fuel surcharge in the near term,” says Hamilton. “Nobody saw prices falling like this.”

Cristobal unloads packages at FILL THIS IN JULIA AH!!!!! XXXXXXX. Photo by Julia Sumpter

Cristobal unloads packages during his morning route in Seattle. Photo by Julia Sumpter

With fuel prices far below the baseline price, drivers such as Cristobal are enjoying their best margins in years. But there’s unease when prices are low — Cristobal’s margins are worst when fuel prices flirt with the baseline but don’t pass it to trigger a surcharge. The surcharge more than covers the added expense of fuel, Cristobal says, so it’s best for him if prices are either very low or remain above the baseline.

The surcharge insulates couriers from volatility (Delivery Express gives all surcharge revenue to drivers), but it affects the psyche of customers. When fuel prices rise, Hamilton says he’ll see customers opt for the consistency and low prices of route delivery over the speed and convenience of on-demand shipments. But since fuel prices have fallen, Delivery Express’ higher-margin on-demand business hasn’t grown. Hamilton’s not surprised. In his field, watching customers deal with fuel fluctuations is as much about psychology as finances.

“There’s less hesitation,” he says. “The delivery expense is one where clients really focus. They look at all their costs, and they see that as one they can control. Now they see it as one they don’t have to pay as much attention to.”

Retailers: Fuel Prices a Small Factor in Broad Economic Growth

Few noticed when gas prices began their tailspin the week of September 8. The weekly average price of regular gasoline fell a fifth of a cent to $3.457 per gallon that week. If your gas station was consistent with the national average, there weren’t folks lining up at the pumps and the price you paid probably didn’t change.

But the steepest drop in fuel prices since 2009 had begun. On September 15, prices were down 5 cents; a week later, another 5 cents. What began as a $0.002 dip eventually turned into a 19-week streak of plunging prices. On January 26, the apparent seafloor after the price dredging, national fuel costs averaged $2.04 a gallon, 38 percent lower than a year prior and 45 percent lower than in June. In Seattle, prices averaged $2.23 a gallon at their lowest. Prices have risen over the past month — Seattle-area fuel is retailing for $3.00 — but the preceding plunge wasn’t an apparition.

Graphic by Mike Forbush

Graphic by Mike Forbush

Economists, columnists, and television talking heads were predicting the price drop would help boost the consumer economy. Fuel is considered an inelastic commodity — one in which demand remains fairly constant despite supply or prices — so every dollar saved at the pump was a dollar to be spent at a local bar, clothier, or grocery store. And the timing couldn’t have been better, as the dip in prices corresponded with the holiday shopping season.

But a strange thing occurred. U.S. consumer spending in December, when everyone should have been taking their gasoline savings and funneling it toward Christmas presents, fell 0.9 percent, the first drop since January 2014 and the largest drop in five years. Cheap fuel, the “tax break” that was supposed to send droves of people to the mall, produced no increase in spending whatsoever. The trend continued into 2015: spending dipped 0.8 percent in January and 0.6 percent in February, indicating more Americans were pocketing their fuel savings than expected.

More money has been flowing in King County. The county’s year-over-year taxable retail sales grew 10.7 percent in September, 7.6 percent in October, 6 percent in November, and 7.7 percent in December, the most recent data available. But as of March, local shop owners said they haven’t experienced unusual bursts of sales since fuel prices fell.

Tipsy Cow owner Keith Mourer. The restaurant had its best month ever in January, but Mourer is unsure of fuel prices’ role. Photos by Rachel Coward.

Tipsy Cow owner Keith Mourer. The restaurant had its best month ever in January, but Mourer is unsure of fuel prices’ role. Photo by Rachel Coward.

“Sales are up, which is great, but I’m not sure how much to attribute to fuel prices,” says Keith Mourer, owner of Tipsy Cow Burger Bar in Redmond and Brix Wine Cafe in Kirkland. January was Tipsy Cow’s best month ever, he says, and Brix’s sales growth wasn’t abnormally large. Tipsy Cow’s January haul was unusual, particularly during what is usually a slow month for restaurants. Mourer thinks gas prices played a role, but not as great as the Seahawks’ playoff run and the improving economy as a whole.

With no abnormal spikes to point out, it’s difficult to credit fuel prices for any increase in the area’s retail success. Mourer puts it this way: He saves $40 filling up his vehicle compared with a year ago, but that’s not enough to take his family out to dinner or to buy a new outfit.

While nationwide retail growth has been meager, retailers offering groceries have fared better. Costco’s non-gasoline January sales in the U.S. were up 7 percent year-over-year. Kroger reported a 5.6 percent jump in non-fuel sales in the quarter that ended in November. Grocers with fuel stations, such as many Kroger and Costco locations, offer an extra draw for consumers, even though low fuel prices can mean lower margins for retailers.

“A big part of the savings from fuel means people are thinking less about it,” says Amanda Ip, spokeswoman for Kroger’s Northwest properties. She says year-over-year fuel sales by volume are up 10-15 percent, so “people are clearly using their vehicles more and driving more than they have been.”

In the humming Puget Sound economy, fuel prices alone haven’t triggered a noticeable difference at shops and restaurants, which many believe is a good thing — it’s better for spending in a market to be dictated by consistent income, not variable expenses. So the greatest effect of cheap gas might be psychological — since consumers are saving money at the pump, they might not worry as much about an extra road trip or a few more cups of coffee.

Eastside livelihoods don’t rise and fall with the volatile commodity, and that’s a good thing. But to say the region is insulated from fuel prices is naive; if the local economy were worse off, many more Eastsiders would be utilizing every last drop of savings.

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