One Tank Of Gas Away

— San Diego hates being considered a satellite of Los Angeles -- until there is a crisis. You see, Los Angeles and environs are

San Diego's crisis cushion. When the U.S. economy is weak, and large cities that rely on air traffic for tourists are ailing, San Diego pulls visitors from the nearby "drive" market, which accounts for 72 percent of local tourist traffic.

Says Jack Giacomini, managing director of the Red Lion Hanalei Hotel in Mission Valley, "It still takes only one tank of gas to get here from the major feeder market, which is Southern California." In the summer, when Arizonans are broiling, "It will be easier economically for the family to shut off the air conditioner, lock up the house, save money on air-conditioning, and take their traditional trip to San Diego."

Tourism is San Diego's third-largest industry, employing 110,000 and generating annual spending of $5.5 billion, according to the Convention and Visitors Bureau. It's true that the industry does not provide many high-paying jobs, and local statistics are suspect, but there is no question that the hospitality business buoys the economy in times of crisis.

And make no mistake: the United States is going into at least a short-term energy crisis that may catapult the economy into a financial/economic crisis. President Bush's plea last week for people to drive less was a tip-off; previously, he had shunned the conservation approach.

Back in 1998, the price of a barrel of oil fell as low as $11. Gas was $1.11 a gallon. It wasn't profitable for oil companies to add production capacity. Instead, they spent their money buying other oil companies. American auto companies continued to produce gas-guzzling cars. China's economy boomed and its citizens fell in love with the automobile. Now, many scientists feel Atlantic Ocean hurricanes may rage for another 20 years, possibly exacerbated by global warming. When supply is weak and demand is strong, prices rise.

Many believe the supply/demand explanation is disingenuous. For example, Michael Shames of San Diego's Utility Consumers' Action Network says, "For gasoline to be $3 a gallon, oil would have to be at $95 a barrel. The refiners are making a killing off the hurricanes. They are gouging."

Either way -- free market or manipulated market -- a remedy won't come soon. Oil companies are pouring money into capital spending, but it takes a decade to bring a new project into production. And it will take a while for consumers to demand fuel-efficient cars and for auto companies to produce them.

There are, however, minority voices. "Oil prices are volatile," says Ross Starr, economist for the University of California, San Diego. "It is conceivable that two years from now, the price will be $30 a barrel," or half what it has been selling for recently. In any case, "the U.S. economy is less sensitive to the price of oil than it was a generation ago," explains Starr, partly because the oil-devouring manufacturing sector is a smaller part of the economy than it was back in the 1970s crisis years.

That is true, but the economy and its financial structure still face problems. Economists generally agree that the U.S. economy will soften the rest of this year and a quarter or so into next year. Then will come the traditional disaster bonanza: the economy will boom as reconstruction money pours into southern states.

But once again, there are dissidents. James Hamilton, economist at the University of California, San Diego, worries that "once the downturn starts, it will tend to develop a momentum of its own. We are talking about something different from historical hurricanes. It will be hard to get the [energy] infrastructure back up; there could be substantial shocks to energy prices, and these factors could tip us into a recession."

The administration wants to pump $200 billion into reconstruction, but the Iraq War is draining federal funds; conservatives want cutbacks elsewhere, such as in health-care or the tax-cut program, notes Alan Gin, University of San Diego economist. Thus, the economy may not get the usual disaster-spending bump. A large deficit could bring higher interest rates and inflation. "There is one sure thing: consumer confidence is going to be hurt by these events," he says. Surveys indicate it's already dropping.

Households making more than $70,000 a year spend 1.7 percent of pretax income on gasoline. For those making less than $30,000, it's 5.3 percent. Companies catering to lower-income people will feel the pinch: San Diego's Petco and Jack in the Box have already said they have been hit by high gas prices. On the day Jack in the Box made its announcement, the stock plunged 17 percent. There has been some gain in transit ridership in San Diego, but officials can't yet say it results from high gas prices.

When consumption falls, jobs are likely to be cut, thus worsening consumption. It becomes a snowball. If shopping falls off, so will retail employment and possibly advertising. Retailers are already cutting newspaper ad budgets. That's likely to impact the Union-Tribune, already reeling from circulation losses.

More than in almost all U.S. markets, San Diego's debt-sated consumers, relying on a housing bubble to continue spending, may not be able to withstand price shocks.

Los Angeles tourists to the rescue -- maybe. If the price of gas goes to $3.50 a gallon, only 19 percent of Americans will cancel trips, according to a poll by Yesawich, Pepperdine, Brown and Russell. A little over half say they would alter plans: 26 percent would take shorter trips and 26 percent would save money on other vacation expenditures.

Despite winter and spring rains, San Diego is already having a good tourist season: hotel occupancy is running at 75.8 percent. Only four other markets in the top 25 beat that, according to Smith Travel Research.

Higher gas prices don't "seem to have that much effect on the Southern California drive market," says Skip Hull of C.I.C. Research in San Diego. They won't this time; San Diego tourism will remain strong, he says.

"Many of the people who visit San Diego have relatively high disposable income," says Jerry Morrison, local hotel expert. Nonetheless, "I am amazed that we haven't seen a falloff with these higher gasoline prices."

San Diego may gain some conventions that would have gone to New Orleans and other devastated cities, say Gin and several others.

"I have never seen the price of gas impact us," says one student of the industry. Some say a lower promotional budget of the Convention and Visitors Bureau will hurt, "but that's hard to argue, since we had an excellent summer. Some managers bitch about the high gas price," but that's just a handy excuse for explaining lousy results, says this tourism pro.

But there is caution. "Volume won't be as strong" as in past periods when the drive market bailed out San Diego, says Giacomini.

"If the housing bubble bursts in the U.S., and the economy goes down, San Diego tourism will go down, but, as after 9/11, we will do better than other cities in a bad environment," says Morrison.

"In the past, the impacts of gasoline price spikes have been negligible," says Sal Giametta, vice president of the Convention and Visitors Bureau. "People have spent less on food, bought fewer souvenirs. However, this time we are more concerned. Oil shortages compounded by increased gas prices, along with other things such as the federal deficit, inflation, and consumer confidence, give us reason to pause and closely watch the situation."

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