By  on August 8, 2006

WASHINGTON — The bad news about spiraling gasoline prices just keeps coming, and it sent the shares of several major retailers downward on Monday.

Heightening fears that consumers will cut back their spending over the next few weeks during the key back-to-school and fall seasons, BP announced that it would suspend production of 400,000 barrels of oil a day in Alaska. The suspension helped drive down shares of Wal-Mart Stores Inc., Target Corp., Federated Department Stores, Sears Holdings and Nordstrom Inc. on the New York Stock Exchange.

Wal-Mart's share price dropped 5 cents to close at $44.82; Target fell 48 cents to $46.74; Federated dropped 20 cents to $34.88; Sears Holdings was down $2.17 to $140.57, and Nordstrom fell 42 cents to $34.46.

Bucking the trend were Kohl's Corp., up 27 cents to close at $59.06 a share, and J.C. Penney Co., up 65 cents to $64.72.

High gas prices have already put a squeeze on consumers, but BP's emergency shutdown and the potential for a broader conflict in the oil-rich Middle East could portend a longer-term impact.

In addition to cutting into tight budgets, gasoline prices, which are tied to oil prices, have great psychological importance for consumers constantly deciding how much they can spend on apparel, a largely discretionary purchase.

American consumers have been resilient as gas pump prices rose, but they are now beginning to switch to a more long-term stance, tweaking the way they live and how they spend their leisure time to adjust to the new reality, said experts.

That reality is starkly different from even the recent past; a gallon of regular gasoline sold for $3.04 on Monday, an increase of 30.2 percent from a year earlier, according to the American Automobile Association.

The rise has hit the consumer with household earnings of $30,000 to $80,000 particularly hard, said Allen Questrom, retail veteran and former J.C. Penney chairman and chief executive officer. The drain of higher gas prices is compounded for people who bought homes with variable-rate mortgages and have seen their payments go up.

"You take the lower-income people, they have been much more affected because their percent of income devoted to interest payments and energy is a much bigger piece of their total disposable [income]," said Questrom.Retailers, coping with increases in their own energy costs, might have to cut back on capital spending, fight to increase efficiency in other areas and keep an even tighter focus on the consumer to adapt.

"It's a game that they have to play, and all these guys and gals have to figure out how to keep giving the customer value or you're going to lose people at the door, and then you still have to figure out how to give value to your shareholders," said Questrom. "Sometimes, you have economies that turn in a way that you really can't make up for all of you have to sometimes just pull your reins in, don't expend capital on things that you could postpone."

Retailers might also come under pressure to accept higher prices from brands, which are also dealing with increased transportation and raw material costs.

The world demand for oil is roughly 85 million barrels a day, with about 1 million to 1.5 million barrels of extra production capacity, said Robert Lieber, professor of government and international affairs at Georgetown University, who has written widely on foreign policy and oil.

"Anything in the world that affects the supply, production and demand for oil reverberates through the entire system," said Lieber. "If there is a crisis somewhere in the world — war, revolution, upheaval, terrorism, a production problem, a hurricane, a bad policy followed by a government that discourages the exploration and production of oil — then that affects the supply."

On Sunday, BP Exploration Alaska, a unit of Britain's BP PLC, began shutting down oil production at Prudhoe Bay due to severe corrosion on a pipeline. Once the field is shut down indefinitely in the next few days, U.S. oil output will be cut by 8 percent, according to the U.S. Energy Information Administration.

The news sent the price for a barrel of light, sweet crude oil for delivery next month up as much as $2.50, to $77.30, on the New York Mercantile Exchange Monday. Some industry executives have predicted $100-a-barrel prices on the horizon.

On the other hand, new oil production capacity is being planned, which could help lower prices over the medium term."No one can tell you where gas prices or oil prices are going in the short to medium term," said Lieber.

The consumer reaction to gasoline prices seems to be evolving. When prices first began to rise, many consumers absorbed the extra cost, borrowing more on credit cards or dipping into savings, said Richard Curtin, director of surveys of consumers at the University of Michigan. Those days might be waning, though.

"They've concluded that they don't expect these gas prices to go down anytime soon and they're making cuts across a broad array of items, and clothing is certainly one of them," said Curtin.

U.S. consumers, not known to be savers, are still using their credit cards for purchases. The Federal Reserve reported Monday that consumer borrowing increased at an annual rate of 5.7 percent in June, up from 3.3 percent in May.

Sales at retailers have been mixed lately. Last week, the sector reported a same-store sales gain of 3.5 percent in July, according to the International Council of Shopping Centers, a result that beat the trade group's expectations, but came in short of what several analysts had forecast.

A poll commissioned by the National Retail Federation in May showed gas prices are having a major impact on more people. Of the 7,388 people who took the poll, 24 percent said gas prices have not had a major impact on them, compared with 42.3 percent who saw no major impact in a 2004 poll.

Of the people polled in May, 37.2 percent said they were cutting back on travel and vacation, while 36.2 percent were eating out less and 27.2 percent said they were spending less on apparel.

"Some of the concern over gas prices is purely psychological," said Ellen Davis, senior director of strategic communications at the NRF. "If stores advertised the price of coffee the way gas stations advertise the cost for a gallon of gas, people would probably start to freak out about that, too. Because consumers are so cognizant of the price of gas, there's more of a psychological impact when it starts to go up."

The constant drumbeat of bad news out of the Middle East might also sharpen shoppers' anxieties over gas prices."Right now, consumers are wishing [high gas prices] would go away, but I think with the recent Israel-Lebanon issue...there's a realization that perhaps it's not going to go away that soon," said D. Maheswaran, editor of the Journal of Consumer Psychology and a marketing professor at New York University's Stern School of Business.

Neither Israel nor Lebanon produce oil, but any instability in the oil-producing region has the potential to raise prices. For instance, Iran has threatened to reduce oil supplies in the ongoing confrontation over its nuclear development program.

"Perhaps [consumers] will go through with their summer plans and then after the summer they will start tightening the belts," said Maheswaran.

Unable or unwilling to continue to ignore higher fuel prices or to simply make targeted cutbacks elsewhere in their budget, consumers might be moving to adjust their routines to the new reality.

"I would now say that we're sort of moving into long-term territory where we're going to see people make some fundamental the way they go about living their lives," predicted Stephen Hoch, marketing professor at the Wharton School of the University of Pennsylvania.

That might mean more carpooling, moving closer to work or not traveling so far to go shopping, he said.

In addition to discounters, said Mandy Putnam, vice president at Retail Forward Inc., accessories stores, factory outlets and book and music shops are among the hardest hit by higher gas prices.

"We're also seeing some effect on adult apparel specialty stores and traditional department stores," said Putnam. "What's happening there is the fact that people are making fewer trips to the mall. What we've seen is a consolidation of the number of stores where people have been shopping."

Shoppers have tended to change their habits incrementally. As long as gas prices don't shoot up dramatically, shoppers will continue to gradually tweak their habits, said Michael Niemira, chief economist and director of research for the International Council of Shopping Centers.

"It's the same old story: The consumer continues to adjust to what may be perceived as the new reality, and as long as there is sufficient income or greater income, then the consumer lives with it," said Niemira.Economists are more concerned that higher oil prices will begin to work their way into the supply chain and pump up prices on other goods, or add to inflation.

"So far, so good," said Niemira. "We're not seeing much of that happening."

Where oil prices are headed is determined by the complex interplay of supply and demand on the global market.

For retailers and vendors, gas prices are not only something to be viewed as a constraint on the consumer, but also a detriment to their bottom line.

Larger companies can protect themselves from moment-to-moment fluctuations through contracts with transportation specialists, but eventually those contracts come up for renewal.

"We're starting to see higher costs affiliated with basically the movement and flow of merchandise through our supply channel," said Bernt Ullmann, president of Phat Fashions, a division of Kellwood Co.

Ullmann said he has not yet passed on costs to the end consumer, opting instead to share the pain of higher prices with his vendors. That might only work for so long, though.

"If this continues, there's going to be a lot of margin pressure and ultimately we may have no choice but to pass it on to the consumer," said Ullmann.

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