Reluctantly Adjusting to Oil Cost
Every Monday morning Dean England, chief executive of a family-owned trucking company, logs onto the Energy Departments Web site and checks the latest average cost of a gallon of diesel fuel. If it is up enough, he raises the charge to haul produce across the country in his tractor-trailers.
A formula has evolved. For every 5-cent rise in the price of fuel, Mr. Englands company, C. R. England Inc., based in Salt Lake City, adds 1 percent to its freight rates. Since 2003, those rates are up 37 percent, yet demand has not slackened. The companys 2,800 trucks are constantly on the road.
The market has been good to us, Mr. England said. But ultimately the extra cost of hauling food has to fall on the consumer.
Demand is similarly strong at other energy-dependent operations, notably railroads, airlines and chemical companies. They, too, are raising prices to recapture as much as they can of the run-up in oil prices.
That is gradually adding to the inflation rate and appears to be contributing to a slowdown in growth but it has not crippled the economy.
As oil prices rise, a noose does tighten around the expansion, said Nigel Gault, chief domestic economist for Global Insight.
Mr. Gault estimates that rising energy prices are currently shaving 1 to 1.5 percentage points from the economys annual growth rate, which is one reason that he expects the rate to slow from the robust 5.6 percent of the first quarter to roughly 3 percent for the rest of the year.
I'm guessing that if oil gets to $100 a barrel, that could provoke a recession, Mr. Gault said, but even then it depends on how quickly we get there. We do seem to be adjusting to gradual increases.
The $8 run-up last week, to $78 a barrel, as violence spread in the Middle East was hardly gradual. But prices did fall this week, to under $73, and the Energy Department forecasts that West Texas intermediate crude oil, a benchmark grade, will finish the year at $73.50 a barrel, up $8 from January.
Whatever the energy costs, many companies have managed to absorb much of the price shock and preserve profits, which have risen to record levels recently as a share of national income. The companies have done this by raising prices and instituting efficiencies that reduce the use of petroleum and natural gas.
Consumers have not fared as well. Rising gasoline prices constitute what economists sometimes describe as a consumption tax. When such a tax is imposed on millions of workers whose incomes have not kept up with inflation in recent years, those consumers eventually cut back on spending. That is one reason that economists see a slowdown coming.
The consumption tax is likely to be $100 billion higher this year than last year, Mr. Gault estimates.
The increased caution in spending is evident in the weekly consumer surveys conducted by the University of Michigan. Those surveyed seem to be losing faith that oil prices can be checked, now that the average price of a gallon of gasoline reached $3.03 this week, up 75 cents since January.
For a long time people anticipated that gas prices would fall back, so they ran up more debt to cover their higher expenses without cutting back on purchases, said Richard T. Curtin, director of the Michigan surveys. And now they have reluctantly concluded, in the past three or four months, that gasoline prices are not going to go down.
But cutbacks in spending have been concentrated among households with less than $50,000 in annual income, according to Mr. Curtins surveys. That is roughly half of all households. Most of those with incomes above $50,000, which contribute to the bulk of consumer spending, are still managing to absorb the higher energy costs without cutting back much elsewhere. Rising gasoline prices are really driving a wedge between lower- and higher-income households, Mr. Curtin said.
Companies often have more room to maneuver than average consumers. Railroads, for example, are operating at high levels of capacity, mostly in transporting ever greater amounts of coal to electric utilities. That has given them the leverage to raise rates enough to cover 75 percent of their increased cost of diesel fuel, says Philip Baggaley, a managing director and transportation analyst at Standard & Poors.
The airlines, through surcharges and fare increases, are also covering three-quarters of the increase in their fuel costs, Mr. Baggaley said. After years of having to keep fares low, the big airlines have achieved a turnaround by shrinking their fleets and flying planes jammed with people, as Mr. Baggaley put it.
Even food companies are getting into the act as energy costs work through the food chain. Kellogg will raise cereal prices by about 2 percent in September, the first increase since July 2004, said Neal Goldner, director of investor relations.
On the other hand, chemical companies are getting a break on natural gas. Petroleum and natural gas are often interchangeable feedstocks in the production of the chemical ingredients that go into foam for cushions, solvents for dry cleaning and plastic for bottles, as well as glues, synthetic rubber, electronic circuit boards and a host of other products.
While oil prices have remained high, natural gas has become cheaper. That is mainly because a milder-than-expected winter left the nation with huge unsold inventories of natural gas that cannot easily be shipped around the world, as oil is.
Dow Chemical takes advantage of the natural gas price drop in its American operations. But the real gain is overseas, says John Dearborn, Dows vice president for energy. While natural gas is about $6 per one million B.T.U.s here, it is only $1 in various Middle East countries.
At Dow, our production is about 50 percent in the United States and 50 percent elsewhere, Mr. Dearborn said, but our preferential investment is elsewhere.
Even so, Dows feedstock costs were $22 billion last year, up from $8 billion in 2003. If we are going to survive, we have to get our prices up, he said. With the global economy booming, prices on all Dow products are up 44 percent on average since 2001, the company reports.
Thousands of companies have shaved fuel costs by using less but getting the same result. Dean England, for example, has installed heaters that run on their own fuel canisters in his companys 2,800 truck cabs. Engines no longer have to idle to generate heat while drivers rest, a more expensive option. He is testing a similar air-conditioning unit.
Our drivers can be cool in the summer and warm in the winter, he said, and we wont have to have any engine idling.
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