boston.com
An oil squeeze looms
American business is absorbing the shock of soaring prices - but not for long
By Kimberly Blanton, Globe Staff, 7/16/2000
tonyfield Farm executives haven't increased their wholesale price for a cup of yogurt, though they have good reason to.
The milk and yogurt maker is facing much higher costs that can be traced directly to soaring prices for OPEC oil: Stonyfield's trucking expenses have surged 8 percent since January, making it more costly to ship its yogurts, including Yo Squeeze, a new yogurt in a tube for kids, to markets as far away as California and Florida.
Oil is popping up in the Londonderry, N.H., firm's costs in other ways. For example, Stonyfield pays more for energy to pasteurize milk. ''Energy is hidden in everything,'' said Nancy Hirshberg, director of natural resources.
While sensational headlines have focused on drivers paying $50 to fill up their Ford Excursions and on $2.50-a-gallon gasoline in the Midwest, American business is silently absorbing the shock of soaring oil prices.
Oil flows through the economy in myriad ways, often invisibly. Sharply higher prices for gasoline and crude are slowly raising the costs of everything, from making automobile parts to delivering the 752-page ''Harry Potter and the Goblet of Fire.''
For Americans who were old enough to drive in 1973, spiking oil prices may stir memories of a quadrupling of prices by the Organization of Petroleum Exporting Countries, which unleashed double-digit inflation by the end of the 1970s. Today, a barrel of oil costs $31.37 on the spot market, nearly double last year's price. Economists fear current steep increases in oil prices may also cause a pickup in inflation - beyond the higher gas prices everyone pays at the pump.
''It's a slow seep'' into the US inflation rate, said Don Ratajczak, an Atlanta consultant who recently retired as director of forecasting at Georgia State University. ''It's not the kind of [inflation] pressures you saw in the '73 and '82 period.''
Statistics released by the federal government Friday confirmed Ratajczak's analysis. Producer prices for finished goods rose 0.6 percent in June, after showing no change in May. Prices for products excluding food and energy - cars, for example, and paper products - fell, while producer energy prices rose 5.1 percent.
''You're still seeing little inflation pressure outside of energy,'' said Cary Leahey, economist at Deutsche Bank Securities in New York. But while there is scant evidence of oil price increases, so far, in the inflation data, there is plenty of anecdotal evidence that business is reeling from oil price shocks.
Transportation charges were first to go up. Early this year, Federal Express Corp. and US Airways slapped fuel surcharges on package deliveries and passenger tickets, respectively, passing rising airline fuel costs on to customers. In the past two weeks, American Airlines and Northwest Airlines have announced oil-related surcharges would be added to freight charges for air cargo.
The vast majority of the nation's goods move across the nation's highways by truck. Warren Hoemann, vice president of the California Trucking Association, the largest state trucking organization, said many truckers at first had to absorb higher diesel fuel costs when prices started going up last year.
But as contracts have been renewed, and as oil price increases have persisted, they are increasingly pushing these costs through to customers, such as retailers and manufacturers.
''Practically everything we touch or eat or wear moves by truck,'' Hoemann said. ''Gradually trucking companies are passing on the prices, and that gets passed on to the consumers gradually.''
The service industry is less prone, though not immune, to oil price spikes. Financial institutions, law firms, and ad agencies that are customers of City Express Messenger Services may pay more for deliveries, due to the higher cost of fueling the Boston firm's fleet of automobiles. Owner Aaron Driben said he began factoring the higher gas prices - up 25 percent between April and May - into his bids on new contracts. Existing contracts are not affected.
''In the new [contract] proposals, we are taking into consideration the additional cost of gas, just as if insurance rates went up - we'd do the same thing,'' said Driben, whose clients include financial institutions, ad agencies, and law firms.
Oil prices don't immediately pass through the economy's chain of suppliers and buyers. Boom times have encouraged manufacturers to build new plants and expand capacity, causing supply gluts for many products. But a US economic boom and rebound in global markets have also made it easier for businesses to pass on higher oil costs by raising their prices.
With demand for plastic soaring, plastics manufacturers paying more for petroleum- and natural gas-based raw materials are able to raise their prices. For example, there has been a 20 percent increase this year for polyethylene and polystyrene, pervasive in US manufactured goods, according to Plastics News, an industry magazine published by Crain Communications in Akron, Ohio.
Rising plastics prices can cause powerful inflationary pressures, economists said. Think about it: Plastics go into making automobiles, bottle caps, cell phones, personal computers, medical equipment - the list is endless. And acres of plastic packaging and shrink wrap cover toys, groceries, and other products sold to US consumers.
Stonyfield Farm's costs for plastic packaging for its yogurt haven't gone up - yet. But as raw materials prices go up, the oil-price squeeze only tightens for the consumer goods company. For example, there is no relief in site for dairy farmers supplying Stonyfield with milk. Eric Sideman, director of technical services for the Maine Organic Farmers and Gardeners Association, said higher oil prices ''are having a big impact'' on dairy farmers who are heavy users of tractors. ''I've already been told by the person I buy hay from to expect a huge jump'' in prices, said Sideman, who is a farmer.
Stonyfield's prices for 6- and 8-ounce cups, and quarts, of yogurt have not been raised for more than a year, and the company has no plans to do so, Hirshberg said.
''So far we've been able to hold the line pretty well. But all of a sudden you reach a point in the economy where a few suppliers are forced to raise their prices and a domino effect comes into play, which forces you to have to increase your selling prices.''
What puzzles economists is why oil's impact on inflation hasn't been greater.
David Wyss, chief economist for Standard & Poor's DRI in Lexington, said one explanation is that oil is a smaller component of the gross domestic product than it was in the gas-guzzling 1970s, due to conservation efforts by manufacturers and energy consumers.
And oil prices, historically, haven't actually gone up very much, when adjusted for inflation, said Wyss, who recalled paying 31.9 cents a gallon in 1965 to fill up his Chevrolet Impala. He calculated that if gas prices had risen in tandem with inflation, that same gallon would now cost $1.65 - close to prices being charged by Boston-area gas stations.
Of course, oil shocks can be temporary and their impact on inflation virtually nil. A yearlong acceleration in oil prices seems to be abating as Saudi Arabia, OPEC's largest producer, proceeds with plans to boost production of crude oil. Forecasts of the future price of oil are based on the complex interaction of OPEC politics and production, as well as world oil reserves and demand. Prices in recent days have softened.
''Even if we get some slackening off in oil prices, some of this is already beginning to feed into'' the inflation rate, said Nicholas Perna, an economic consultant in Richfield, Conn. ''That's what the Fed is worried about.'' The Federal Reserve at its June meeting voted against another hike in the federal funds rate, currently at 6.5 percent. The Fed has raised interest rates several times in the past year to slow down the economy and forestall inflation. Central bankers said economic growth may be ''moderating.''
To gauge oil's impact on inflation, economists look at the ''core'' inflation rate. Because it excludes prices of food and energy, the core consumer price index is considered a better measure of indirect inflationary pressures. The core CPI rose a moderate 2.4 percent during 12 months ending May 2000. (The broader CPI, which does reflect higher pump and home heating oil prices, increased 3.1 percent for the year, a percentage point above year-ago levels.)
During the late 1990s, as oil prices fell to abnormally low levels, many Americans did not fully appreciate the benefits of a plunge in demand on world oil markets as economies in Japan and southeast Asia slumped. Americans - and the US economy - benefited from a surplus of oil on world markets. Low oil prices also reined in inflation.
''Now Asia's back, and its demand for oil is back,'' Wyss said. ''That was a free gift, and you can't expect that to continue.''
Material from Bloomberg News was used in this report.
This story ran on page H01 of the Boston Globe on 7/16/2000.
© Copyright 2000 Globe Newspaper Company.
[ Send this story to a friend | Easy-print version | Add to Daily User ]
© Copyright 2000 Globe Newspaper Company
Extending our newspaper services to the web Return to the home page
of The Globe Online |
