High oil prices siphon profits from US firms
Everyone from airlines to paper companies feels pinch as oil nears $40 barrel.
Jim Simon of Hudson, Fla., always wanted to own his own semi. So, this March, he bought a red 1982 Ford LTO 9000-loaded with a microwave, full-size bed, and more drawer space than he has at home. But now the beloved truck is for sale - a casualty of the high price of oil.Skip to next paragraph
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"We have to park it, or we'll lose everything," says Julie Simon, his wife. "After we get through with fuel costs, we're not making anything."
Mr. Simon is not alone. With the price of oil remaining high, big energy users like semiconductor manufacturers, paper companies, and airlines are feeling the pinch. For some, their energy costs have risen to the point that they are faced with the unpleasant prospect of either raising prices or reducing their operations.
"Costs are going up, it's not just the consumer who's feeling it," says David Wyss, chief economist for Standard & Poors DRI in New York.
Although the higher energy prices have not worked their way into the consumer price index yet, government officials are worried. Recently, US Energy Secretary Bill Richardson said oil prices are "dangerously high."
With oil prices closing in on $40 a barrel, President Clinton says he's looking closely at the prospect of opening up the Strategic Petroleum Reserve (SPR). This would help to relieve some of the political pressure, although it's not clear what impact it might have on the world price.
"It could knock the price down, as long as OPEC does not reduce production," says Mr. Wyss.
However, the political heat is rising. Next Tuesday, the Senate Energy Committee will hold hearings with Secretary Richardson and other energy experts. Governors are also worrying about the coming winter. Yesterday, Gov. Bob Taft of Ohio and Gov. Tony Knowles of Alaska held an energy summit in Columbus, Ohio, with natural-gas producers to talk about the high prices.
"We're going to have a winter that will be a challenge for all of us," says Governor Taft.
For many businesses, it's already a challenge. Take the chemical industry, which consumes about 6 to 7 percent of all the energy used in the United States. Basic energy costs are up about 60 percent over last year, calculates Kevin Swift, chief economist for the Chemical Manufacturers Association. "I'm starting to hear grumbling," says Mr. Swift.
Normally, the industry would raise prices to recoup its higher costs. And to some extent, it has. The price of plastics has risen 21 percent over last year. But, because of new manufacturing plants coming on stream, there is considerable competition, which limits the ability of companies to raise prices. At the same time, many markets, such as autos and housing, are flat which means demand is waning. "This quarter, we're starting to see a bite," says Swift.
Most companies are trying to figure out ways to cut down on their energy expenses. Where possible, they are shifting over to lower cost coal. Last year, when the price of oil rose, many companies shifted to natural gas.
But this year, gas is high as well. To try to cut down on energy expenses, International Paper Co. is considering turning down its machines, says Norm Davis, director of global energy purchasing. If the machines are turned down, this will reduce the amount of paper they can produce.
"We are taking aggressive action to manage in a prudent manner, but there are lots of factors, including what's best for the customers, communities, and the environment," says Mr. Davis.
For the industry, one constraint against raising prices is a glut of product. Ruth Stafford, president of Kiva International, a Phoenix, Ariz., paperboard supplier, says the price of recycled paper has dropped from $125 a ton to $65 to $75 per ton. "There is a more-than-normal supply, which is a real restraining influence on price increases."
Heavy competition in the trucking business is also keeping truckers from recouping their higher costs. In a good year, profit margins are 3 percent, says Bob Costello, chief economist for the American Trucking Association.
Since January, he says 35,000 trucks have been taken off the roads because of the high fuel costs. "Many truckers are just hanging on in the hope this will pass," says Mr. Costello.
The economics of trucking are particularly hard on owner-operators, such as Mr. Simon. On a recent trip from Atlanta to Miami, he was paid $853.08. His fuel bill came to $542.14. He was able to tack on a fuel surcharge, but that only gave him another $24.88. "There's not much left over after the fuel bill," says his wife.
With the profits low, Simon will probably park the truck and work for a car-hauling firm. His wife says that's a tough way to make a living. "He always comes back from a trip all bruised and cut up. Running one of those trailers is not easy."
(c) Copyright 2000. The Christian Science Publishing Society