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MENDOZA IN THE NEWS

RV industry feeling pinch?

Higher gas prices to put pressure on local economy

by Andrew Soukup, South Bend Tribune

March 14, 2005

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Ten days ago, gasoline prices hovered right around $1.89 per gallon of regular gasoline.

If the predictions of oil industry experts turn out to be correct, don't expect to see prices that low anytime soon.

According to the most recent estimates released by the Energy Information Administration, the analytical arm of the U.S. Department of Energy, gas prices are expected to climb to record-high levels of $2.15 per gallon by this spring. South Bend hit that mark on Friday.

That leaves economists and energy experts wondering at what point the U.S. economy and consumers will start feeling the pinch.

"This is global right now," said Tom Kloza, the chief oil analyst for the Oil Price Information Service.

"It's absolutely not unusual to bounce from the plunge in the fourth quarter. But it is unusually early," he said, referring to the rapid increase in gas prices during the first quarter.

On March 4, area gasoline prices shot up nearly a quarter overnight to reach $2.09. After retreating to $1.99 last week, prices jumped again on Friday to reach $2.15 -- breaking the record-high set last May.

The recent surge in gasoline prices has many wondering what's the cause.

Did a pipeline get destroyed in the Middle East? Are there problems with the shipping lanes? Is there a gasoline shortage in general?

No, Kloza said.

But that doesn't mean prices won't stay away from record levels set last year -- or won't impact local consumers and Elkhart's RV industry.

Behind the increase

Normally, gas prices begin to increase in March as demand increases in advance of the summer driving season, which stretches from April to September.

This year, however, Kloza said the fuel increase is happening earlier than normal due to speculative investors wondering if there will be enough gasoline this summer.

From a purely fundamental perspective, there is no reason why gasoline should be as high as it currently is, Kloza said.

"There's plenty of gasoline now," Kloza said, "What's happening is nobody knows how much will be available in April and May."

Part of the speculation is due to the volatile stock market, Kloza said. Instead of pouring money into traditional equities, investors are purchasing crude oil futures, which is helping to drive up the overall cost of gasoline.

So how high might gas prices eventually reach?

"I'm not among those people who think it will reach $3 or $2.50," Kloza said. "But I think it's probably reasonable to assume we might get to $2.25 or $2.40 in the next three months before there is some relief."

Economic impact

Those predictions recently led Treasury Secretary John Snow to blast energy prices he said are too high and act as a tax on the economy.

"What's going to happen is people will spend more money on gasoline and less on other things," said Paul Joray, an economics professor at Indiana University South Bend.

Joray believes that in the short-term, retail stores will be among the most adversely affected, as consumers use a greater portion of their disposable income to fill up their gas tanks.

Trucking firms and airlines also will be hurt by soaring fuel costs, Joray said. While the competitiveness of the transportation industries might keep prices low for a while, at some point fuel surcharges will have to be tacked onto the final bill.

What's more, as people drive less, that means less business for those in automobile service shops, said Jeffrey Bergstrand, a University of Notre Dame finance professor.

"(Rising gas prices) will put a bit of a crimp on economic growth," Bergstrand said. "But I think the economy will continue to be strong and unemployment will continue to shrink."

What about RVs?

Lurking behind the day-to-day impacts of increasing gas prices, however, are the effect those prices will have on the Elkhart County-centered recreation vehicle industry.

The Recreation Vehicle Industry Association, a Reston, Va.-based trade association, notes that despite rising interest rates and record-high gas prices in 2004, the industry set a quarter-century record for shipments.

"Generally, high prices don't affect RV sales, it's only when there are shortages, like what happened in the '70s," RVIA spokesman Jim Lubinskas said. "Even if they get up to $2.40, I don't think you'll see an impact.

"$2 was big psychological burden. I had never seen it over $2, but in places where it got the highest, we still saw record shipments. We really don't foresee any appreciable slowdown."

The RVIA believes that the savings an RV owner accumulates driving to a location compared to flying to a hotel location offsets any gas price impact.

And those consumers who identify themselves as most likely to purchase an RV have annual incomes ranging from $81,000 to $93,000, meaning rising fuel prices might be an afterthought in their annual budgets.

But Bergstrand wonders if 2004 RV sales were more a reflection of pent-up demand getting released from the recession of previous years.

"Some of that demand has probably been satisfied," Bergstrand said. "They're still going to have a good year, but I imagine it will have a little impact."

The true test of how the RV industry will be affected by rising gas prices may not be known until consumers start looking for a different kind of recreational vehicle to purchase, Joray suggested.

"I would say there has to be some price point where (the price of gasoline) has to be a problem," Joray said. "I'm not sure what it is, but there has to be one."

When that happens, Joray believes consumers' spending habits might alter how manufacturers build their RVs.

Joray compared the RV industry to the automobile industry, which has seen consumers purchase more fuel-efficient, hybrid vehicles in greater volume as energy prices rise.

In the first two months of the year, the market share for full-sized SUVs and large pickups declined 1.2 percent and 2 percent, respectively, according to Edmunds.com. At the same time the market share for fuel-efficient compact cars increased 2.2 percent.

Research data compiled by the RV industry shows that consumers tend to think recreational vehicles cost more than they really do. That's usually because when prospective buyers think of RVs, they often imagine high-cost Class A motorhomes -- 100-gallon vehicles that often get 10 miles per gallon.

If gas prices reach the point where consumers worry too much about paying for an RV, Joray said manufacturers might have to eventually start thinking about fuel efficiency.

Some manufacturers already produce relatively light RVs. However, most of those were designed and marketed with towing capacity, not fuel efficiency, in mind.

"Intellectually, there is some point where you are not going to buy an RV or go on a vacation," Joray said.

"And while two years ago, maybe you wouldn't have done it, (an RV manufacturer) might say that gas prices are high enough now where it makes sense to take some of those steps." 

 

Early spurt

Although gas prices have been consistently rising since 2000, analysts say that month-to-month fluctuations usually follow a pattern. One of those fluctuations is a price increase in late March or early April. That spike has come earlier than expected in 2005. As of Tuesday, gas prices in the Midwest already have risen 28 cents since the year began — the fastest increase in the last four years. By contrast, in 2003, when war with Iraq seemed imminent, prices had risen by 24 cents.

 


 

 

 

Source: Energy Information Administration
Tribune Graphic/JOHN STUMP

The months ahead

Though record gas prices set in 2004 were surpassed on Friday, we have a long way to go before gas is as costly as it was more than two decades ago.

In inflation-adjusted dollars, consumers were paying $3.08 per gallon in March 1981. That's far higher than the $2.15 price seen at many South Bend-area gas stations.

However, the current high prices -- which are expected to set new records this spring -- aren't being caused by geopolitical situations, analysts say. The current price of crude oil, $54.43 per barrel, is more a reflection of speculative investors.

That means if a global energy crisis erupts, prices could climb relatively quickly and exceed most analysts' current predictions of $2.40.