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Oil slicks the outlook
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June 26, 2000: 11:08 a.m. ET
Rising price of oil, gas, could impact economy, Fed's thinking, analysts say
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - William (Bill) Richardson circled the dark green SUV parked inside Mercedes' Manhattan showroom very slowly, running his hand across the shiny hood. It had everything he wanted: leather seats, moon roof, CD changer, side running boards, chrome detailing and tinted windows.
"It's nice, isn't it?" he asked rhetorically, a gleam in his eye as he leaned deep inside the rear storage space. "This can certainly fit a lot of stuff."
And then it happened. Just as in the movies, just as at any dealership in any other part of the country on any given Saturday, Richardson took a gander at the spec sheet glued to the back rear window and let out a little yelp -- that high-pitched sound induced by pulling in one's breath suddenly and sharply.
"Whoa," he said, jerking his head back, lifting his glasses and rubbing his eyes with his hands. "That's really not good. I didn't realize it was that low."
Low? Richardson wasn't scoffing at the $47,000-plus price tag of the ML430 four-wheel-drive V-8 off-roader; he knew long before he ever set foot inside the showroom that price wouldn't be low. He was looking a few lines below that -- at the miles per gallon column -- noting that, with gasoline at current levels, his SUV would suck about $1.70 from his pocket every 10-to-15 miles.
'Aint no cheapskate
"I'm not a cheapskate or anything but that's a lot of coin," the 34-year-old investment research analyst said. "It bothers me that it's going to take $40 or $50 a week to fill this thing up.
"I never even used to look at these things," he sheepishly added.
 Slowly but surely, it's happening. The effects of higher oil prices and rising gas prices are beginning to have an impact on consumer spending. Sure, they may be able to afford to dish out big bucks for those gas-guzzling trucks and SUV's that have been all the rage for almost a decade, and they can certainly afford to keep the tank topped up, but people are beginning to think a little more carefully about whether they want to be spending upwards of $200 a month to keep them running on the road.
"Consumption is up considerably and that trend is not going to reverse itself," said Dan Veru, a portfolio Manager with Palisade Capital Management. "Higher oil prices are going to be with us for quite a while, and while I do think it will moderate from the current levels it is definitely going to have an impact, both on consumer spending and on the economy as a whole."
But the effects of higher oil prices go a lot further than the country's roads and freeways. On a big-picture scale, it is the type of quandary that economists on Wall Street and officials at the Federal Reserve are likely beginning to factor into their thinking about the progress of the U.S. economy, and whether maybe holding off on further rate increases may be in order, according to analysts.
Not a Fed factor
While few expect the sustained level of oil prices will immediately factor into the Fed's thinking on monetary policy at this week's FOMC meeting, some are beginning to speculate that the peripheral effects of higher oil prices over a long period of time could sway the Fed's thinking as early as their August gathering, at which most analysts currently expect a rate hike, according to a recent Reuters poll of primary Wall Street Treasury dealers.
"Our economists are increasingly concerned about the impact of higher oil prices on the wider input cost issue within the U.S. economy, and how that feeds through into inflation and consequently impacts the Fed's decision on interest rates," UBS Warburg analyst Matthew Warburton told CNNfn.com.
 For Richardson, it means he'll have to bite the bullet and dole out a bit more each time he pulls his brand-new SUV into the gas station. "My wife over there has wanted one of these things for a long time," he said, pointing to his eager spouse chatting it up with one of the dealership's salesmen. "There's no way I'm going to get out of here without signing on the dotted line."
But some of their friends in their neighborhood in New Rochelle, NY, have passed on the luxury SUV's in exchange for something a little less thirsty for gas. "Some friends of ours down the street were also looking at this, but they got one of those Chrysler PT Cruisers instead," Richardson said. "It's about half the price and apparently it gets much better mileage."
The PT Cruiser gets 20 miles per gallon in regular city driving, 25 miles per gallon on the highway, according to specs provided by DaimlerChrysler (DCX: Research, Estimates). The limited edition models starts at $19,860.
Some economic impact
While rising oil prices are having the most direct impact on consumer thinking and spending, they are also impacting the economy on other levels.
Take Barry Shapiro. The 58-year-old president of Toymax Enterprises, a subsidiary of Toymax International (TMAX: Research, Estimates). Shapiro has already seen his toy and game manufacturing business affected by the recent steep climb in petroleum prices, a crucial ingredient in plastics that go into some of the games and toys he produces and supplies for his clients.
 The Plainview, NY-based game and leisure product company has enough diversified business producing and is selling everything from novelty key rings for Walt Disney Co. (DIS: Research, Estimates) to kites to specialty candies. The company posted a loss of $2.2 million, or 20 cents a share in its fiscal third quarter, according to First Call. Sales rose 8 percent to $50.1 million.
At the same time, the cost on certain types of toys -- the Laser Challenge System radar toy game and the Rad 2.0 radio-controlled robot, for instance, tend to creep higher as costs for producers that make all the bits and parts that go into the games increase. Toymax also makes the popular "Fun Noodle" floating styrofoam piece used in swimming pools and at beaches.
"At the moment, gasoline and oil prices are having a direct effect on our business, because it's affecting the price of plastic," Shapiro said. "If it adds a smidgen to my costs, it also ads a smidgen to the hundreds of other factories we deal with, which has a more of an effect on us than an additional quarter-point rate hike from Greenspan here and there."
No downturn in sight
Will higher oil prices have a lasting impact on the economy? Perhaps. So far, few analysts are forecasting a decisive downturn in prices. While the Organization of Petroleum Exporting Countries (OPEC) agreed last week to raise output in an attempt to choke off crude prices, few expect it to have any kind of discernable impact on prices, both at the raw level and at the pumps.
To be sure, not everyone believes that the "oil issue" will have a direct impact on the progress of the economy, or on the Fed's thinking at all.
 Gregg Hymowitz, an analyst with Entrust Capital, told CNNfn's Street Sweep Friday that while oil prices have risen dramatically due to less global supply, the U.S. economy is much less driven by oil compared to the 1970s, reducing the shock value higher prices might have on the overall economy.
What's more, while prices are higher, there is no global shortage, suggesting that prices won't rise much above the $32-a-barrel range they're at now. And, he said, OPEC will realize at some point that it is not in its own best interest to keep the price of oil at current levels. (460KB WAV) (460KB AIFF)
Other analysts including Standard & Poor's MMS's Rob Palombi, agree.
"Will the Fed talk oil when it meets this week? More than likely," Palombi said. "Will they discuss how the price of oil may be impacting the economy? Definitely. Will they alter their decision about whether or not to raise rates based on the recent level of oil? I doubt it. But they'll be considering it."
What does that mean for Richardson? It means factoring in both higher finance costs and higher operating costs on his new Mercedes -- two things he wasn't anticipating when he initially thought about getting one a year ago.
But does it mean he'll skip purchasing one?
"No, I don't think higher rates and gas prices and things like that are long-term, I think it's temporary," he said. "Greenspan alone isn't going to sway me from getting this car." 
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