Stephen Gallagher, U.S. chief economist at SG Cowen, said energy prices have remained on the high side for longer than anticipated. "We expected high prices in mid-February, when prices spiked higher due to an anticipated war with Iraq. While the war didn’t materialize, it did leave prices at an elevated level. Consumers are still buying houses and durable goods, but they are curtailing their discretionary spending to do so. The combination of higher energy prices for longer periods and the cold winter has been a double whammy for the apparel sector."
The economist pointed out that some firms have passed along some of those costs, at least temporarily boosting prices at the wholesale level. Trucks and shipping firms, for example, are passing the costs on a business-to-business basis. While they don’t want to permanently raise rates, Gallagher said, they are hitting manufacturers and importers with surcharges to compensate for the higher costs.
Some actions could have a more lasting effect on prices. "We’ve been getting warnings from refiners that they are still making home heating oil and haven’t started refining for gas for summer use yet," Gallagher said. That could mean low gasoline inventory along with higher prices at the time when consumers are gassing up for vacations.
George Magnus, chief economist for UBS Warburg in London, wrote in a report last week that crude oil prices are up 33 percent over the average of 2002 and are up more than 60 percent year-over-year. While the firm’s oil analysts believe they will come down if the U.S. goes to war with Iraq and Saddam Hussein is disposed of, the longer they stay at higher levels, "the greater the risk that the damage has already been done to global growth," he wrote.