Oil prices like sand in economy's wheels

WASHINGTON — The price of oil gushed to a record high Monday, spreading dangerously to factories, groceries, gas stations and every citizen's pocketbook.

Builders are building less, the government reported. Manufacturers are cutting back, another report said. General Motors Corp. and Ford Motor Co. said they would cut second-quarter production.

The galloping energy prices are doubly painful as the nation teeters on the edge of recession: High energy costs push companies to charge shoppers higher prices, then those consumers and businesses cut back in turn, dumping more cold water on the economy.

"It's like throwing sands in the wheels of the economy," said Brian Bethune, economist at Global Insight. "Things slow down. There is more friction and there is more complaining."

Oil prices marched past $103 a barrel on Monday, the latest in a recent string of record-high oil prices, before settling at $102.45.

The steep run-up in oil and other energy prices "hits deeper and deeper into the consumers' ability to spend. With a lot of households stretched by high food prices as well, it creates real problems," said Joel Naroff, president of Naroff Economic Advisors.

Reports Monday showed factories feeling the sting of soaring costs for oil as well as other raw materials, pushing production costs higher even as some have to cope with fallout from a sour housing market that has sapped demand for their products.

Manufacturers in February logged their weakest performance in nearly five years, the Institute for Supply Management said. Industries that suffered declines included makers of furniture, textiles, machinery and chemical products.

Construction spending plunged by 1.7 percent in January, the biggest decline in 14 years, the government said. Cutbacks covered a wide range, from home building to hotels to highways.

The average price of a gallon of gasoline stood at $3.165 Monday, according to AAA and the Oil Price Information Service. The Energy Department

expects gas prices to peak at a record level near $3.40 this spring, and some analysts predict pump prices could rise to nearly $4 a gallon when the busy summer driving season arrives.

The average price of a gallon of regular unleaded gas in the Charleston area Monday morning was $3.065, according to AAA. That price is 32 percent above the average of $2.308 a year ago and is just 11.3 cents below the record high of $3.178 set in September 2005 in the aftermath of Hurricane Katrina. Since posting a low for this year of $2.839 on Feb. 12, the local average price has climbed 22.6 cents, or 8 percent.

It's not much better in the air. Airplane fares climbed 0.8 percent in January.

Diesel prices, used to transport the vast majority of the nation's goods, are also soaring. Diesel prices hit another new record of $3.674 a gallon Monday.

"Bulky items — milk, soda pop, eggs, cheese, fruits and vegetables — probably will have higher transportation costs to bring those items to stores," Bethune said. "How much of that is passed along to customers depends. In terms of overall costs of products, it might not be huge. It could be a few cents. But overall it will add up."

Food prices are rising but it's hard to divine exactly how much of that increase can be traced to higher energy prices. Food prices rose 0.7 percent in January, reflecting more expensive fruits, vegetables, poultry, pork and dairy products, according to the Labor Department's consumer price index.

With the overall economy slowing, profit-squeezed businesses are having to make difficult decisions: How high can they raise prices? What costs can they cut, including workers?

Employers did cut jobs in January, marking the first nationwide loss in more than four years.

Although new-job creation is thought to have improved somewhat in February, the nation's unemployment rate is expected to bump up to 5 percent. The government releases those new figures on Friday. The jobless rate averaged 4.6 percent last year and could climb to as high as 5.3 percent this year, according to the Federal Reserve.

High energy prices, the housing bust and a credit crisis are feeding fears that the country is heading into a recession or is in one already.

The economy skidded to a near halt in the final three months of last year, growing at pace of just 0.6 percent.

Many economists think growth in the January-to-March quarter could be even worse, around a 0.4 percent pace, and an increasing number think the economy is actually shrinking now.

Michael Buettner of The Post and Courier contributed to this report.