Grocery prices may rise due to high cost of oil

Posted: Monday, February 21, 2000

Experts said the oil shortage could cause prices at the pump this summer to rise to $1.50 per gallon in the Northeast and $2 or more in California. It may also add a few pennies to the cost of basic grocery items, from soup to nuts.

Such price increases may be needed to cover higher transportation costs, the result of skyrocketing diesel-fuel prices.

The recent oil crisis has already pinched the pocketbooks of many consumers this winter and likely will continue to do so over the coming months.

So far, the shortage has sent heating-oil prices soaring to nine-year highs and has forced some people to scramble for fuel or go without.

``The modern economy is fueled by oil,'' said Brian O'Connor, spokesman for Citizens Energy Corp., a Boston nonprofit organization.

Following are some questions and answers about the recent oil crisis and its trickle-down effects:

Question: Why is there an oil shortage and how does it affect fuel prices?

Answer: Experts say it's the supply-and-demand equation at work. The Organization of Petroleum Exporting Countries, with the agreement of several key oil-producing non-OPEC nations, began cutting its production of crude oil, the basis for a host of fuels, in order to stimulate prices, which had hovered at unsustainably low levels. OPEC succeeded: Reducing supply drove up prices dramatically.

Last week, crude oil topped $30 a barrel, the highest level since the Persian Gulf war. And higher crude-oil prices push up the cost of producing heating oil, for instance.

Q. Are there any other factors involved in creating such high heating-oil prices?

A. Yes. Aaron Brady, an analyst at Energy Security Analysis Inc. in Boston, explained the domino effect on heating-oil prices this way:

``The reason why prices spiked so much was because inventories of heating oil were so low. The reason that inventories were so low was because refining margins have been pretty low for the past year, so refineries have not been running at high rates. The margins were low because of a period of oversupply before this year. Then OPEC cut back on crude-oil supplies, forcing prices of crude to very high levels.''

And the recent cold snap throughout the Northeast caught many heating-oil retailers by surprise. Because the previous three winters had been relatively mild, most retailers had not stocked enough supply.

Q. How much have area heating-oil prices gone up?

A. In Pennsylvania, the average price of a gallon of heating oil jumped 44 percent from $1.10 to $1.59 between the weeks of Jan. 17 and Jan. 24, according to U.S. Energy Department statistics.

During the same time period, heating-oil prices in New Jersey rose 42 percent, from $1.21 to $1.72.

During the week of Feb. 7, the Energy Department's most recent recorded week, the average price of heating oil reached $1.82 a gallon in Pennsylvania and $2.01 in New Jersey.

Q. Can I get financial assistance to pay my heating-oil bill?

A. Yes, if you are a low-income resident you may qualify for a grant from the federal Low Income Home Energy Assistance Program. For example, a family of four with an annual income of $18,370 can qualify for financial assistance.

The deadline to apply for a grant is Feb. 29. To obtain an application, contact your county's Department of Public Welfare.

Q. What about diesel-fuel prices, and why should I care about them?

A. In the mid-Atlantic states, diesel prices rose about 30 cents a gallon, from $1.39 to $1.69, between the weeks of Jan. 17 and Jan. 24. The week of Feb. 7, diesel fuel reached nearly $2 a gallon. Last Monday, the price drifted down to $1.81.

Analysts say high diesel prices may raise the price of consumer products down the road. This is because the nation's truckers use diesel fuel to transport everything from bread to high-definition TVs.

Some trucking companies have passed along diesel increases to product manufacturers, which, in turn, may increase the prices of their goods to wholesalers and retailers.

``When crude oil goes up, everything from gasoline to Vaseline gets more expensive,'' said O'Connor of Citizens Energy.

But Acme Markets Inc. said it does not expect dramatically higher prices on food in the coming months.

``A lot of the contracts for merchandise we buy are placed many months in advance,'' said spokesman Walt Rubel. ``So the impact will be minimal, if any. ... I wouldn't even say grocery products will be a few cents higher.''

Rubel said the cost of transportation is just one of many that determine the retail price of products. He noted that storage and utility costs, for example, are other factors in the equation.

Q. What items will become more expensive, and when?

A. No one knows yet.

Q. Why are gasoline prices expected to reach $1.50 per gallon this summer?

A. As of Feb. 14, the average price for a gallon of regular leaded gasoline was $1.36 - just a few hundredths of a cent higher than it was a month ago, U.S. Department of Energy statistics showed.

Analyst Brady said gasoline inventories are low right now because of OPEC's production cutback. On March 27, OPEC is scheduled to decide whether or not its members should produce more crude oil.

Q. Why have prices for heating oil and diesel fuel risen so dramatically since mid-January, whereas gasoline prices have been climbing slowly since last summer?

A. Analyst Brady said demand for heating oil is seasonal, whereas demand for gasoline is steady throughout the year.

The price of diesel, he said, has risen so much because the fuel comes from the same supply source as heating oil. Brady said the two fuels are virtually the same product, but heating oil contains more sulfur.

Q. Why do fuel prices shoot up quickly but take months to come back down?

A. Because fuel cannot be generated quickly enough to keep up with demand, Brady said. So it takes time for new supplies to get into the marketplace.

Q. What will bring fuel prices down?

A. A decision by OPEC to allow its members to produce more crude oil. ``It's not in (OPEC's) interest to have crude prices so high,'' Brady said. ``When you have oil prices this high ... it destroys demand, because people cut back in their purchasing. Between now and the end of March, there's not a whole lot that would bring (prices) back down.''

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