Oil prices present 'significant downside risk' to Washtenaw County's projected economic recovery
Escalating oil prices threaten to slow the pace of Washtenaw County's budding economic recovery, University of Michigan economists said.
Future trends in oil prices, which sped above $100 a barrel in the wake of turmoil in the Middle East, are "so hard to predict," U-M economist George Fulton said. Nonetheless, oil prices represent a "significant downside risk" to the economic forecast predicting that Washtenaw will add 8,840 jobs from 2011 through 2013.
"If we evolve into a high-price environment for a sustained period of time, it will dampen the economy," Fulton said. "It will reduce consumer confidence, it will increase inflation and it could affect the car-buying market."
Brandy Ekins of Jackson drives 70 miles round-trip five days a week to her job in Ann Arbor and is worried about the rising cost of gas.
Lon Horwedel | AnnArbor.com
The biggest threat from oil prices is that auto sales will disappoint as consumers question purchases and conserve cash to pay for higher gasoline prices, Fulton said.
The economic forecast projects that U.S. sales of light vehicles will rise from 11.5 million in 2010 to 13.1 million in 2011, 15.1 million in 2012 and 15.9 million in 2013.
The 2013 sales level would be 52.9 percent higher than the industry trough of 10.4 million vehicles in 2009.
Fulton said the economic forecast is based on an "assumption that we won't be into a period of sustained high prices at the gas pump."
"But we could be dead wrong on that," Fulton added.
Washtenaw has only three remaining automotive plants, led by 2,000-person Automotive Components Holdings plant in Saline. But suppliers and other related companies are directly affected by changes in the auto industry.
The county's manufacturing sector had 12,564 employees in 2009, down from nearly 31,000 in 1999. The manufacturing sector bucked years of losses by adding 538 jobs in 2010, and the sector is expected to add an additional 414 jobs by 2013, according to the U-M forecast, which was conducted for AnnArbor.com.
But higher oil prices could undercut that projected job growth.
University of Michigan economist George Fulton discusses the 2011-13 economist forecast for Washtenaw County.
Lon Horwedel | AnnArbor.com
David Cole, chairman emeritus of the Ann Arbor-based Center for Automotive Research, said the auto sales market reacts quickly and "dramatically" to changing oil prices.
"The challenge for the industry is to be able to be sufficiently agile to move product to where the markets are, and of course this creates uncertainty when you're dealing with cars, particularly if the public gets the expectation that there's a wild ride up, a wild ride down — people don't know what to do, they're confused, so they don't buy," Cole said.
Higher oil prices will extract more dollars from consumers, but they could also provide a boost to Ann Arbor area startup alternative energy companies hungry for clean tech investment.
Pittsfield Township-based Accio Energy, for example, is seeking early-stage angel investment to accelerate development of its wind energy device, which would generate electricity without moving parts.
"Oil price shocks generally create a greater sensitivity for the need for renewable energy sources, and a greater sense of need for renewable energy sources is good when you're a renewable energy startup," Accio CEO Jennifer Baird said. "It's that simple."
Contact AnnArbor.com's Nathan Bomey at (734) 623-2587 or nathanbomey@annarbor.com. You can also follow him on Twitter or subscribe to AnnArbor.com's newsletters.
Comments
LarryJ
Fri, Mar 11, 2011 : 11:40 p.m.
So, Dr. Foster, you are suggesting that we make our decisions based on this year's economy? Take the money and run. Forget the fact that we are damaging our planet and that it will be a very different place within the lifetime of our grandchildren? Forget that an economy based on cheap petroleum will leave us in a poor competitive position in future years? Our auto industry is already in a poor competitive position because of decisions made in the 80s and 90s, based on availability of cheap petroleum. I think we should change our economy to mitigate climate change and better serve our children and grandchildren. That means using less carbon and developing sustainable energy sources.
Ignatz
Fri, Mar 11, 2011 : 6:46 p.m.
OK, aa.com, you can eliminate this article. I just saw where oil fell below $100/barrel. All is well again. ;-)
Edward R Murrow's Ghost
Fri, Mar 11, 2011 : 7:19 p.m.
Love your wit! You slay me. Good Night and Good Luck
walker101
Fri, Mar 11, 2011 : 6:25 p.m.
Great less drivers on the road!
Jim
Fri, Mar 11, 2011 : 6:05 p.m.
I think they are missing the bigger picture. Rising oil prices due to restricted supply (that is, Peak Oil) will impact the ability of ANY economy to grow in the future, not just Washtenaw county. If gas prices are reaching $4 in the Spring, and with a tepid economy at that, then what would prices be at in a booming economy in the Summer? And no, added drilling won't be enough to change oil prices. At all. The U.S. peaked in oil production in 1970, and has been declining ever since. The rest of the world is following suit. The other thing that will mitigate oil prices at this point is demand destruction. Maybe its time for the NG vehicle.....
Dog Guy
Fri, Mar 11, 2011 : 3:55 p.m.
"The biggest threat from oil prices is that auto sales will disappoint as consumers question purchases and conserve cash to pay for higher gasoline prices, Fulton said." Therefore let's all increase consumer confidence and spending with, "Happy Holidays" and "Seasons Greetings." All the experts say these two incantations work magic.
Edward R Murrow's Ghost
Fri, Mar 11, 2011 : 3:48 p.m.
"Gas prices are up 67% since Obama became President. Nuf Sed-" Yes, the president has it in his powers to nullify the law of supply and demand. He also has it in his power to wave a magic wand and bring peace in the Middle East. Check out Article 2, Section 5 of the Constitution. I'm certain the powers reside there. Good Night and Good Luck
Matthew
Fri, Mar 11, 2011 : 3:31 p.m.
Gas prices are going up? Looks like taking the bus became an even better idea.
Mever12
Fri, Mar 11, 2011 : 3:22 p.m.
Agree 100% with Andy Jacobs. Wake up America!! What makes you think that gas prices will EVER go down, it is a finite resource we are working with here and the demand globally is continuing to rise as more and more people enter the middle class and purchase a personal vehicle for their own utilization. I can personally attest that having a fuel efficient vehicle, is not more expensive - it is a personal choice. My first car was a nissan sentra that got over 30 miles to the gallon and I paid the less than $3,000 dollar cost out of pocket, from my high school salary obtained from bagging groceries. I think I made $5.65 an hour. When I got married, my husband and I opted to sell our cars from college and invest in 1 car that would be shared. Yes, we have a nominal monthly payment (under $250) - which may be cost prohibitive to some, but our hybrid gets great gas mileage (45MPG in the dead of winter, and 60MPG when the temp is higher), so rising gas prices don't impact us as much. Plus we made it a priority to LIVE where we WORK - his 5 mile commute (both ways) gives us options (riding bikes, public transportation) when gas prices increases. Because we live close to a bus line, I am able to commute in independently using public transportation. The price of gas is ALWAYS going to go up, time to adjust to a new norm and alter our infrastructure to reflect changing realities. People are so stuck in this county about what their entitled to (low gas prices), that they ignore every miscalculation that got them to this point (over consumption) My vote will always go to a politician that understands the complexity of our energy system, and makes the hard calls in order to move us away from the oil dependent nation we are.
jcj
Fri, Mar 11, 2011 : 3:40 p.m.
"Yes, we have a nominal monthly payment (under $250)" And how much was the cost of the vehicle?? You purposely left out the down payment cost. Show me a hybrid that gets 45mpg with a monthly payment of $250 with no down payment and I will buy 3 of them!
jcj
Fri, Mar 11, 2011 : 3:37 p.m.
"I can personally attest that having a fuel efficient vehicle, is not more expensive" Run the numbers and show something as PROOF of this statement! I am not going to argue any of your other points. But part of the problem we always have is that people make unfounded statements. So show me the figures. I said I would not be offended if someone shows me how I am wrong. But I am offended by emotional outburst with NO logic!
Soothslayer
Fri, Mar 11, 2011 : 2:54 p.m.
Wrong. Gas should be taxed 50% like it is in Europe and Japan. We should increase gas tax 2% each year to help "wean" us off of it. These local tax revenues are then used to maintain roads, and plan and build locally manufactured mass transit systems and maintained infrastructure. So most all of this new revenue is spent right here on jobs and manufacturing instead of being sent overseas for a consumable for which we have little/nothing to show for at the end of the month. Sorry America the glory days of cheap gas are gone. Look for $5/gallon by summer. Guess we shouldn't have bulldozed perfectly good farmland (now at a premium as the overpopulation of the world continues) so we can have hour long commutes eh? Higher gas prices are a GOOD thing and spur domestic economy as consumers will consciously conserve, plan trips, purchase and keep in good repair fuel efficient vehicles which begets a decrease in foreign trade deficit. Consumers by way of energy conservation will spend less on foreign oil and have more available for local and domestic goods and services. "American Made" gas guzzlers contribute to a big portion of our trade deficit. Driving one, especially in a manner that decreases mpg, is unpatriotic. It causes more of our locally earned income to go towards foreign oil expense and increases our dependency on it. This is why we put our own soldiers in harms way in the middle East but ignore humanitarian atrocities in the rest of the world where we have no other interests. You're a smart businessman, run the numbers Mr Snyder and you'll see although its a bit painful its much better that WE raise the price of gas through state and local taxes today. Each day we wait is revenue forever lost which could be used to build our tomorrow. The big 3 should be leading the way in building high efficiency vehicles and mass transit systems. It's in all of our own best interests and together we can do this. This is a win-win and should make the treehuggers
xmo
Fri, Mar 11, 2011 : 2:30 p.m.
Please think the next time you vote for someone who doesn't mind gas at $4.00 a gallon. (You know who you are)Drill baby Drill!
jcj
Fri, Mar 11, 2011 : 3:28 p.m.
If you think I don't mind gas at $4 a gallon you misunderstood the reason for my post. If you can show me how the average person is better off buying a new car to save gas cost I would be interested to hear it. I just wanted to take an objective look at the cost of buying a new car to save money. I am definitely in favor of speeding up shallow water drilling permits in the Gulf. <a href="http://dailycaller.com/2011/02/15/first-gulf-of-mexico-drilling-company-seahawk-files-bankruptcy-because-of-offshore-drilling-moratorium/" rel='nofollow'>http://dailycaller.com/2011/02/15/first-gulf-of-mexico-drilling-company-seahawk-files-bankruptcy-because-of-offshore-drilling-moratorium/</a>
jcj
Fri, Mar 11, 2011 : 2:20 p.m.
If I am wrong with my figures I am sure someone will point it out. And I will not be offended. I DO NOT own any oil stock. But I know there are people that have a hard time with the gas increases (myself included) and they just need to look at everything when buying to save money.
Boo Radley
Fri, Mar 11, 2011 : 2:18 p.m.
All of this panic and skyrocketing gasoline prices because of unrest in Libya? I do understand the problem of overall uncertainty in the region ... but we get almost none of our oil from Libya. Libya produces only about 2% of the world's oil and the US is the smallest importer of those that use that 2%. So why the high prices?
KJMClark
Fri, Mar 11, 2011 : 8:34 p.m.
They're both right, but there's more. Libyan production is only a little over 1% of world production, but they're almost 3% of world oil exports. We don't really care about production, because we're an importer. 3% of the available oil is a bigger deal. John B is right about light sweet. The extra oil Saudi Arabia is putting up to cover the shortfall is heavy sour crude, which is much harder to refine, and most refineries can't handle it. Next, the Saudi's claim to be over 9 million barrels per day production, but no one is really able to confirm that. Finally, almost all of the problems in Libya before the demonstrations and rebellion are also true of Saudi Arabia. High population of under 25, very high unemployment, poor income distribution, lots of poverty, dictatorship by a small, very rich elite, and rising food prices. Now imagine if riots and rebellion like that of Libya broke out in Saudi Arabia. That's 15% of world exports that could go off-line. Why are prices rising here when we don't use much Libyan oil? Well, what's stopping a Venezuelan tanker headed for Louisiana changing course and heading for Italy? It's a world market. There's no reason Mexican, Venezuelan, or Nigerian oil can't head to Europe instead. Heck, even US crude often gets shipped somewhere else. The only oil that can't is the stuff coming from the Canadian tar sands. That's supposedly why West Texas Intermediate was so much below Brent prices for a while.
John B.
Fri, Mar 11, 2011 : 8 p.m.
Ignatz is correct. There is also a third reason: Libya's oil is light sweet crude. Really good stuff. Low sulphur, easily refined into many final products. European refineries can generally ONLY handle light sweet crude. Ours can typically handle pretty much anything, up to and including heavy, sour crude. (Our strategic reserve is heavy, sour crude, as is Canada's, I believe). So the Europeans are scrambling to find light sweet crude to replace the lost Libyan production. Italy is probably the hardest hit, as they were getting about 70% of their crude from Libya. I think Berlusconi needed a lot of it for his bunga-bunga parties....
Ignatz
Fri, Mar 11, 2011 : 5:15 p.m.
Two reasons. 1) There's a perceived panic and therefore traders just up the bidding. It's an accepted reason by consumers. 2) Those who do rely on Libyan oil are now in the market for non-Libyan oil. The price of the latter goes up because of increased demand.
jcj
Fri, Mar 11, 2011 : 2:17 p.m.
The price at the pump is both real and psychological. The rise in gas cost is significant for all of us, but people need to carefully look at their actual cost before they go out and buy a new car to save on gas cost. Can you afford the payment? Can you afford to take money out of savings for a down payment? I know you need zero down many places now. But you might want to get that monthly payment down by putting some money down. Lets assume If you drive 10,000 mile a year. You get 20 miles to a gal = 500 gal of gas a year The yearly cost for gas is: @ $3.00 a gal = $1500 a year @ $3.50 a gal = $1750 a year @ $4.00 a gal = $2000 a year @ $4.50 a gal = $2250 a year @ $5.00 a gal = $2500 a year Lets assume you get a car that gets 30 miles a gal If you drive 10,000 mile a year. = 333 gal of gas a year I have rounded off the numbers a little @ $3.00 a gal = $1000 a year = a savings of $500 a year @ $3.50 a gal = $1165 a year = a savings of $585 a year @ $4.00 a gal = $1330 a year = a savings of $670 a year @ $4.50 a gal = $1500 a year = a savings of $750 a year @ $5.00 a gal = $1665 a year = a savings of $835 a year Any savings you get per year in gas cost are going to be eaten up in a couple months in payments and an increase insurance cost. If you think its hard to pay an extra $40-$60 a month in gas How are you going to make that car payment?
John B.
Sat, Mar 12, 2011 : 10:23 p.m.
I can tell you that, based on my experience with three vehicles driven over 450,000 miles total, if you drive a new vehicle 25,000 miles per year, there will be a period of perhaps 3-5 years where your maintenance cost is low (tires, brakes, etc.). After that, you have perhaps 125,000 miles on the vehicle, which is about how long transmissions last, and those cost about $3000 to rebuild. If you paid for the vehicle by the end of year three, the financial trade-off can still be net positive. The insurance costs have nothing to do with maintenance costs.
jcj
Sat, Mar 12, 2011 : 12:19 a.m.
John B I agree with the $2500 savings in gas cost per year if you switch to a vehicle that gets 40 mpg vs 20 mpg. I question the $1000 a year savings in maintenance. Although it doesn't take long for maintenance cost to add up. We have a 1999 model and have never put $1000 in it in 1 year. I suspect if you have a vehicle that is old enough to need $1000 a year in maintenance the insurance cost will increase significantly. I would agree it appears if you drive 20,000 a year or more a new vehicle would probably save you money. Providing you don't have 4 kids and they don't play hockey.
John B.
Fri, Mar 11, 2011 : 10:07 p.m.
Looks like the woman in the photo drives at least 20,000 miles per year. (17,500 just to work, assuming 50 weeks per year). I'll bet she drives more like 25,000 actually. So at *maybe* 20 mpg (Ford Windstar van, that's optimistic) she needs to buy 1250 gallons per year. Figure $4.00 per gallon (conservative, looking forward). That's $5000 worth of fuel per year. If she buys a 40 mpg vehicle, that would save her $2500 just in fuel costs. Figure also that a new vehicle will probably save at least $1000 per year in repairs for maybe three or more years (don't ask me how I know...), so you've got $3500 in savings. That's almost $300 per month. You can buy quite a few vehicles for that. Just sayin'....
northside
Fri, Mar 11, 2011 : 2:12 p.m.
All the more reason to develop alternative energy sources and cut oil usage. This has been painfully clear since the 1970s but the only time many people consider this in when it hits them in the pocketbook. It doesn't help that our main economic institution, the corporation, is geared toward short-term profit, not toward what's right and good for society over the long-term. Gas and auto companies have been the main obstacles to change.
Top Cat
Fri, Mar 11, 2011 : 2:12 p.m.
Gas prices are up 67% since Obama became President. Nuf Sed-
John Q
Fri, Mar 11, 2011 : 4:16 p.m.
Hey Top Cat, if you want to play that game, the stock market was around 8,000 when Obama became President. Now it's around 12,000. What does that tell us?
cinnabar7071
Fri, Mar 11, 2011 : 3:44 p.m.
Thats all real nice northside but Bush isn't President anymore. You'll put the car in the ditch if you keep looking in the rearview mirror
northside
Fri, Mar 11, 2011 : 2:47 p.m.
The price of gas has essentially doubled since Obama took office: $1.85/gallon in Jan '09, $3.52 now. But how about Bush? It was $1.45 when the Dec '00 Supreme Court ruling cliched his Electoral College victory. In '08 it was consistently above $3, peaking at $4.07 in June 2008. Nuf sed?
zip the cat
Fri, Mar 11, 2011 : 1:16 p.m.
I don't know how they feel they can say what the economy will be like 2-3 yrs down the road. Sounds like a lot of hot air to me
jcj
Fri, Mar 11, 2011 : 1:09 p.m.
If there is anyone in the county that does not realize that there is a "significant downside risk" to the economy as oil prices soar they must have their heads in the sand. I don't think the least educated have a problem understanding that and don't need a University of Michigan economists to tell them.
snoopdog
Fri, Mar 11, 2011 : 1:07 p.m.
In 2008 when gas hit 4 bucks a gallon everyone was blaming G.W. Bush. Now that gas is on its way to 4 bucks a gallon it will still be G.W.'s fault I suppose or those greedy oil companies. Just remember, a couple years ago gas was well under 3 bucks a gallon. We need to be drilling for more oil in the USA and opening up several more refineries. Good Day
KJMClark
Fri, Mar 11, 2011 : 1:03 p.m.
Thanks for the follow-up. It's not just that people get confused by the price changes and postpone buying. To some extent, any new car purchase is an extravagance. There aren't many people who couldn't hold onto their current car/truck a little longer. If you're mentally budgeting X for transportation, including payments plus fuel, keeping the old one may be a lot cheaper. In the past, fuel costs were supposed to be a small part of that, but now it's a larger part. If you're still trying to keep your transportation budget at X, a car payment on top of the suddenly higher gas prices may not seem like such a good idea right now. What assumption did they make about the housing market? If Prof. Shiller is concerned about another 10-15% drop nationally, we should be watching for a further 5-10% drop in Washtenaw County. I *hope* they weren't assuming a recovery in their model. I would expect prices to finally bottom out around 2012-2013, though a slower growth due to oil prices might push that bottom further back. Corelogic's latest assessment is that housing prices dropped another 2.5% in January. The *January* trade deficit was higher than expected, in part on the back of higher oil prices, which have increased significantly since then. That deficit comes right out of GDP growth, so you can expect the national economy to slow further just from the drag of oil prices. And a Bloomberg poll from yesterday (1) showed that the only two things that Republican and Democratic voters agree we should cut is foreign aid and the President's rail/energy initiatives. Hopefully Ms. Baird is right. It would be nice to have alt. energy jobs to look forward to. What else is doing well? What about agriculture? USDA says the value of farm crops in Michigan increased 28% last year compared to 2009. (1) <a href="http://www.bloomberg.com/news/2011-03-09/government-shutdown-opposed-by-americans-in-poll-faulting-republican-cuts.html" rel='nofollow'>http://www.bloomberg.com/news/2011-03-09/government-shutdown-opposed-by-americans-in-poll-faulting-republican-cuts.html</a>
Do not taunt Happy Fun Ball
Fri, Mar 11, 2011 : 1:02 p.m.
Lets' not forget the $.50-$.60 per gallon tax on every gallon of gas pumped. Fill-up with 20 gallons and you just paid about $10-$15 in taxes.
Brad
Fri, Mar 11, 2011 : 12:55 p.m.
So then the area will have an increase of 8K jobs in the next three years unless it doesn't? I could've written that "study". Is it any wonder nobody believes economists?