The financial zombie effect

Nobody is jumping for joy at the specter of the Commonwealth Utilities Corp. hiking electricity prices by 3.5 cents per kilowatt hour, but nobody who reads my shameful weekly screeds will be surprised by the news. Increased petroleum prices are like zombies in horror movies, they keep popping up and coming at you from all sorts of directions. And we’ve got plenty of financial zombies looking for some financial flesh to devour, thanks to this energy situation.

But even scary movies have their lighter moments, and if you’re looking for some good news, consider that Saipan’s gasoline ($2.599) is not significantly more expensive than some places in the mainland (about $2.50 in some parts). Mobil and Shell are doing an admirable job of holding down prices in Saipan. Meanwhile, an energy economist in Houston (I forgot his name if, in fact, I ever knew it) has pronounced that $3 a gallon gasoline is on the way, so, well, there you are. I’ve also stated that the $3 benchmark is on the way, but I think that level is more likely to be crossed after the U.S. dollar begins to take a serious fall, and I have no idea when that will happen.

Anyway, is this an oil “crisis” yet? Well, not yet, but let me fill up my motor mouth will some 87 octane here and gas on about the economic factors.

We’ll start here: The impact of higher energy prices on Saipan will come via direct ways and indirect ways. One direct way is that the retail sector is going to face reduced demand for its products from residents, since these residents will be essentially made poorer by the 30 percent increase in their CUC electric bills. This is called the “income effect,” and any merchant knows that when your customers have less coin in their pockets, they’ll be throwing less coin into your till.

So while retail sector can expect less revenues, many of Saipan’s businesses can also expect increased costs. This is another factor we’ll put in the “direct” category. I don’t know how much energy the garment industry uses, but it must be a substantial amount, and when you consider hotels, restaurants, and the rest of these energy users, well, their accountants won’t be smiling.

Bottom line from the direct factors: Reduced sales for some businesses, and increased costs for all of them. That’s a double whammy to profits.

Meanwhile, the indirect impact on Saipan’s economy is probably the bigger factor. Industrial Asia provides the Commonwealth’s tourists, and industrial Asia is very oil-thirsty. If high oil prices start messing up industrial Asia’s economies, then the impact on Saipan, Rota and Tinian tourism will be obvious. Of course, higher fuel prices will also put upward pressure on air fares for tourists, but, for reasons too boring to recount here, I don’t think that a mild increase in air fares would have a significant impact on Commonwealth tourism arrivals.

In fact, it’s the U.S. mainland that is really the place that should be terrified of higher energy prices, and I’m at a loss to explain why the Prozac nation isn’t freaking out about it. For example, airlines are a “leading indicator” of economic activity, and the airline industry is teetering on full-blown crisis. As goes transportation, so goes an economy. I think there are ripple effects on top of ripple effects that haven’t really sorted themselves out yet.

As for the Commonwealth, it may want to consider that next year’s economy might have less activity than this year’s, solely because of the energy price factor. This would be a dandy time for the government to trim the fiscal sails for choppy seas and to consider a budget that is under, not over, the $200 million mark. It would be a nice goal, at least.

Another good goal would be to fill up your gas tank right away, since I don’t see how local gasoline can stay at this comparatively benign price when oil is up around the $55 a barrel mark. Gas up the car, sell the airline stocks, and hope for the best.

(Ed Stephens, Jr. is an economist and columnist for the Saipan Tribune. Ed4Saipan@yahoo.com)