When Higher Energy Costs Tingle Urban America, They Sting Rural

Rural residents have to drive farther for basic goods and services and so have been hit harder by high fuel costs
Photo: Greg Younger [1]

No one needs reminding that in the last year crude oil prices jumped by 86 percent while the price of natural gas increased 43 percent.

As consumers, we immediately experience the most obvious impact of the dramatic rise in energy costs at the gas pump. But for rural residents, high energy prices unleash a cascade of bad news that ripples through everyday life. Compared with urban areas, residents of rural areas are more dependent on oil for everything, from transportation to heating to making a living.

Rural residents tend to drive longer distances [2] to access basic goods and services "“ including health care "“ and they have fewer transportation alternatives such as public transportation. Even as the current economic crisis is provoking a drop in energy prices, analysts agree that the end of cheap oil is upon us and rising energy prices are not likely to let up any time soon.

Rural Areas Are Being Disproportionately Affected by High Energy Prices

Evidence is mounting of high energy prices' greater impact on rural areas. In June, the New York Times reported [3] that "with relatively low wages and high use of pickup trucks and vans, rural families spend up to 13% of their income on fuel while the national average is only 4 [percent]." The problem is particularly acute for workers and families in the South, where long work commutes are common.

Compared with urban areas, food costs also are disproportionately higher for residents living in rural areas. For the average American, food accounts for about 13 percent of household spending. Rural residents spend upwards of 20 percent of their income on food. Long distances to food supplies and a lack of retail alternatives increase the cost of food in rural areas. Rising energy prices simply exacerbate this situation.

The residential housing stock of rural areas is yet another cause for concern. According to the USDA's Economic Research Service [5], housing quality is lower in rural versus urban areas. The type of housing also differs in rural versus urban areas. Over the last 20 years in rural areas, the rate of mobile home ownership has more than doubled, to nearly 20 percent. Mobile homes are notoriously poorly insulated and energy inefficient. This, combined with the reliance on electrical heating in mobile homes, adds considerably to the burden of rural residents.

Those living in rural areas also tend to pay higher prices for electricity due to long distances between population settlements and variations in terrain, which add to transmission costs. The decoupling of electricity production and distribution is also likely to have serious negative consequences for rural areas.

Deregulation will likely hit rural areas harder than urban areas for three reasons:

First, rural areas are less likely to have alternative sources of supply.

Second, citizens may have little or no access to information about how to lower their energy usage.

Third, because rural utilities are smaller, they may have less negotiating ability with large distributors to achieve competitive prices for electricity.

Since the 1950s, cheap energy enabled mobility through the Interstate Highway System, and the ensuing decentralization of people and economic activity benefitted rural areas. While there are no definitive studies that calculate just how much American rural development of the last 50 years owes to the low cost of transportation, nonetheless we can and should consider how today's drastically changed circumstances will affect the potential for future economic growth of rural America.

High energy prices will affect different industries in different ways:

Natural resource-based industry

Diesel pump with 2006 prices in Port Clyde, Maine
Photo: Ellentk [6]

Natural-resource-based industries, a foundation of many rural economies, are experiencing the deleterious effects of rising energy prices. The impact on agriculture and natural resource extraction varies based on markets, products, time, and the ability to pass on rising costs to customers. Over the last two years, the price of agricultural commodities has increased substantially due to input costs and rising demand. For most commodities, however, rising costs fueled price increases.

A few examples of energy price impacts on resource-based products highlight the complexity of the times. Take the case of packaged and fresh food. Because of extended shelf life and packaging, processed food producers can pass on to the consumer at least some of the effects of rising costs. In contrast, fresh foods producers have only a limited ability to pass on increased input costs given the perishable nature of their product, the immediacy of required consumption and the sensitivity of their products to transport modes.

In mining and timber, the impact of rising energy prices on business costs varies with the product and production process. In some cases "“ such as timber processing "“ mills can turn to co-generation to help offset rising costs, while paper producers have fewer degrees of freedom to counter the rising cost of energy. At the same time, rising fuel prices contribute to a greater disparity between standing and delivered values for forest products, as this increases costs for harvesting timber and transporting timber products. The rise in diesel prices increases the cost of timber harvesting and delivery.

Mining is an inherently energy intensive industrial activity. Rising energy prices dampen the establishment of new mines and can reduce exploration activities. Mines in general lack the flexibility to adjust rapidly to rising fuel prices.

Manufacturing

While some economic activities have little choice of location, especially agriculture, coal, oil and gas, others have much greater flexibility and tend toward locations near markets, a critical input like labor, or land.

Much of the decentralization of economic activity over the last fifty years explicitly moved toward rural areas to take advantage of cheap land and labor. In the 1970s and 1980s, rural areas were the beneficiaries of the mobile parts of industrial reorganization. Research on branch plants describes such industrialization as mature, capital intensive and cost sensitive.

Now in an era of rising energy costs, these same facilities may have little flexibility to make adjustments in either production process or product mix to cope with changes in input prices. Furthermore, many of these establishments are part of global supply chains that also are experiencing the effects of rising energy costs. Some experts speculate that rising energy costs will eventually bring production back to the US, but in the immediate period, reductions in capacity and shutdowns are occurring, especially in the auto sector where gas-guzzling vehicles are piling up in inventory.

Distribution and warehousing

Another facet of rural economic development of the last 15 years is the growth of distribution and warehousing. Since the 1980s, this type of activity filtered out of central cities to suburban peripheries to rural areas adjacent to interstate highways, where these businesses have access cheap land and good transportation access. Now many companies are rethinking their distribution strategy in terms of distance from a customer and a customer's final market, including outsourcing and just-in-time (JIT) inventory practices.

Both outsourcing and JIT are energy intensive. JIT and outsourcing, while working well in the 1980s and 1990s, may now be a burden [7] as supply chain managers seek to reduce travel time to final customers. As a result, logistics firms are considering alternatives to the model of distribution built up over the last 25 years. In the near term, more multi-modal transportation planning [8] is emerging to lessen the impact of rising energy costs. Consolidation and dispersal will likely occur as companies seek practices to reduce transportation costs, including consolidation of operations in closer range of markets.

The public sector

Other sectors affected by high energy prices include the public and not-for-profit sector of rural areas. In many rural communities, the public sector (including municipal government, schools, and hospitals) provides the lion's share of jobs. These organizations are key sources of local income, but at the same time, they rely on earned income for their revenue stream, especially schools and local government through the payment of taxes. Rising energy prices are having serious impacts on the public sector and there are few programs nimble enough to respond to their problems.

Currently, the crisis of the financial services sector is distracting attention from concern about the relationship between economic development and rising energy prices. Most probably, in a month's time, however, colder weather will once again highlight the effect of rising energy costs, especially on rural America.

Amy Glasmeier is an economic geographer at Penn State University. She spent two years working with the Appalachian Regional Commission as the John Whisman Scholar.