WASHINGTON - Terry Grandchamp's Virginia home-remodeling business is booked through spring and he's planning to bump up his prices to help cover the high cost of gasoline and building materials. But when it comes to his own finances there is no passing the buck, so Grandchamp is doing his best to conserve fuel at home and on the road.
Chemical maker Tomah3 Products Inc. of Wisconsin is somewhat less confident customers will continue to absorb the soaring price of natural gas in 2006. That's forced company president Steve King to shrink his work force through attrition and hire a commodity broker to manage his fuel purchases.
At North Carolina-based Family Dollar Stores Inc., the biggest worry these days is that the already tight budgets of low-income shoppers will be nearly busted by the expected surge in home-heating costs this winter. The company aims to stabilize itself by selling fewer discretionary goods and more essentials such as food and health products.
Such is life for consumers and companies grappling with the prospect that today's high energy prices may stick around for a while. Crude-oil prices, while sharply below the 2005 peak of almost $71 a barrel in August, are expected to average more than $55 a barrel through the end of next year and potentially longer than that. That is more than two-and-a-half times the $19.70 a barrel that crude-oil futures averaged during the 1990s, and about 60 percent more than the average price since 2000.
It's probably not enough to cripple the economy in 2006, but stubbornly high prices for oil and natural gas could stunt growth and increase inflationary pressures for the second year in a row. With supplies still relatively tight, there is always the risk of a more severe energy-related economic shock if there were a major disruption like the most recent hurricane season.
Economists say the more likely scenario is that Americans will begin to breathe a little easier by the second half of the year. That's because they will have already absorbed much of the pain of a multiyear run-up in prices and will benefit from stable, if not falling, energy costs.
From airlines to manufacturers to retailers, "we're seeing a lot of emphasis on conservation in business," said Stephen P. Brown, an economist at the Federal Reserve Bank in Dallas. Companies that weren't already making changes before hurricanes Katrina and Rita are doing so now because they saw how tight supplies are and how easily a disruption could push up prices, he said.
At the consumer level, Brown sees the discounting of SUVs and the premiums auto dealers are charging for gas-electric hybrids as the early signs of a slow but significant change.
"These things take time," he said. "Quite often, people mistake the amount of time it takes to adjust to prices as evidence of society not responding."
Grandchamp, who lives in Annandale, Va., said he hopes at some point to own a hybrid vehicle, but for now he and his wife simply try to drive their gas-guzzling van and SUV less - a change in behavior that he says is permanent.
"I don't believe in just wasting money," said the 55-year-old Grandchamp, who coordinates errand-related driving with his wife and has asked his kids to take the bus home from school.
Similarly, Tomah3 Products, which manufactures chemicals used in industrial cleaning fluids, has grudgingly adjusted to the high price of energy. Natural gas, which the company uses to heat its boilers, is about twice as expensive as last year, while the cost of the petrochemicals Tomah3 uses as raw materials is up by about 50 percent.
Company president King said he's increased the price of his finished products more than a dozen times since the summer of 2004, but that it hasn't fully offset the jump in expenses. King has tried to make up the difference at factories in Milton, Wis., and Reserve, La., by operating with 5 percent fewer workers, but profit growth is lagging.
"I've assimilated the hit," King said. "I've passed along most of what I can and now I'm prepared to live with it. But in my opinion, prices will come down."
That would be welcome news for Family Dollar Stores of Matthew, N.C., which saw its profits erode in 2005. Its main customers are people who earn less than $25,000 a year and therefore most vulnerable to rising energy prices.
With its clientele spending less on clothing and other discretionary goods, Family Dollar intends to boost sales by stocking its stores with more essential goods, such as milk, bread, cleaners and health products.
But even that strategy may have its limits. Experts say when utility bills soar this winter, many poor families may decide to cut spending on clothing, health care and food in order to keep their homes warm.
"This winter will be a catastrophe," said Skip Arnold, executive director of Energy Outreach Colorado, a nonprofit that helps the poor pay their utility bills. "The overall economy is a little better than it was two years ago, but that doesn't seem to have benefited our most vulnerable households."
Oil prices are forecast to average $58 a barrel in 2006. While that is up slightly from $57 a barrel in 2005, the good news, according to several economists, is that prices are expected to fall in the back half of 2006.
Increased energy prices and interest rates are expected to dent consumer spending in 2006 and that is why economists are calling for U.S. economic growth of about 3.3 percent in 2006, down from 3.5 percent in 2005. But they also say lower consumer and corporate spending should help offset energy prices' effect on inflation.
Economist Nariman Behravesh of Global Insight said core inflation could climb as high as 2.5 percent in the first half of 2006 as 2005's energy prices trickle through the economy. But price pressures will ease by the second half of 2006 as oil and natural gas costs make a post-winter retreat and the Federal Reserve continues to gradually raise interest rates.
"That will cool down the housing market," Behravesh said.
Perhaps no other industry has been clobbered as badly by high fuel prices in recent years as the U.S. airlines. Taking cues from budget carriers Southwest Airlines Co. and JetBlue Airways Corp., the rest of the industry has been aggressive about cutting costs but has had difficulty raising fares to profitable levels.
Delta Air Lines Inc. and Northwest Airlines Corp. were not up to the challenge and filed for bankruptcy in 2005, but other carriers have become much more efficient as a result of the soaring oil prices and they are cautiously optimistic about 2006.
"In that sense, it has been rewarding in a sick way," said Paul Tate, the chief financial officer of Denver-based Frontier Airlines, which earned $6.9 million in the July-September quarter. "We're leaner and meaner with oil at $55 a barrel coming off the peak than we were going up to $55 the first time."
Brian Jennings, the chief financial officer of Oklahoma City-based oil and gas producer Devon Energy Corp., said he does not believe oil prices will ever revert to the 1990s average of $20 a barrel again because producers are struggling to keep up with demand growth and production costs are higher.
However, Jennings also believes that conservation will gradually have an impact on the market.
"The U.S. consumer is underestimating the impact it can have on global energy prices," said Jennings, who has been driving the same Mercury Capri since 1982 and who boasts of the energy efficient windows he recently installed at home.
But if conservation falls by the wayside - if there is a resurgence in SUV sales as gasoline prices drop - Jennings believes "this economy will remain subject to economic shocks driven by energy."