Organizations consider options if oil prices stay high

Wednesday, June 21st 2000, 12:00 am
By: News On 6

Greg Crum knows that OPEC leaders are meeting Wednesday and that their decisions could trim the price of the fuel used to power Southwest Airlines Co.'s aircraft. But the airline executive has already concluded that the days of low prices are gone.

Mr. Crum said it appears that crude oil has permanently moved to a higher price level as a result of the decision of the Organization of the Petroleum Exporting Countries last year to curtail supplies.

"My opinion is that OPEC looked at the whole world economy, said it's time to raise the base price of crude up to the new level, and that it will be at a level that everyone will get used to and it won't destroy economies," said Mr. Crum, vice president of flight operations at Southwest.

As a result, the Dallas airline has undertaken a wide variety of steps to reduce use of jet fuel, which has risen in price from under 40 cents a gallon in early 1999 to $1 at many airports now. Mr. Crum explained: "We had a fiduciary responsibility not to just swallow that increase."

Across Texas and the world, companies and organizations big and small are facing the realization that the sudden rise in energy costs may be here to stay.

That's not a happy thought as they dig deeper into their pockets.

Businesses and consumers should get a clearer picture about the immediate future of energy prices this week after OPEC members gather in Vienna, Austria.

The leaders will be looking at an unsettled world situation in which crude oil prices have spiked upward in recent weeks, much as they did before OPEC's pivotal March 27 meeting. At that meeting, OPEC members agreed to boost production by 1.7 million barrels a day and add an additional 500,000 barrels if the average price of a basket of OPEC oils averaged more than $28 over 20 consecutive days.

That average exceeded $28 this month, but OPEC leaders then said they would have to study the need to increase production. As traders realized that OPEC wasn't going to automatically boost output despite the higher prices, prices climbed sharply, closing near $33 a barrel Wednesday and Thursday.

Down for now

With analysts now expecting some boost in production, crude oil futures fell Monday to $31.69 a barrel on the New York Mercantile Exchange, down from $32.33 Friday and from $32.95 Thursday - its high point since the March OPEC meeting. Futures fell at one point to $30.90 in Monday trading.

But with few people expecting crude oil prices to drop significantly even with increased production, businesses are having to come to grips with the higher prices they must pay for their fuel. Many times, they do have to swallow the increase.

For Carrollton-based Crosstown Delivery Service Inc., the higher fuel costs have increased the $2,000 weekly fuel bill to $3,000.

"I did a small fuel surcharge," Crosstown owner Terry Upchurch said, "but it's only a dollar per shipment, and it really doesn't add up to near what the fuel is running now. We're basically having to eat the fuel costs right now, and it's kind of putting everybody in a crunch."

He estimated that Crosstown, a 22-vehicle operation, is recouping about $200 a week but must absorb the other $800.

"We're just stuck in the middle. When prices go up, we're at their mercy. We can't pass on the costs, because the customer is willing to pay only so much."

The prices have risen sharply both for diesel, which fuels his heavy trucks, and for gasoline, which fuels his cargo vans used for courier service. If he is to provide the service, it's going to cost him.

"Now I am focusing on trying to consolidate shipments. If people call in and say they want a rush order to go to Fort Worth and I can't get something else to go with it, I really can't take the business because I can't make any money," Mr. Upchurch said.

"I'm having to turn business down. For me to take one delivery to Fort Worth for $30, I go in the hole."

Diesel indicators

On the other end of the scale in size is Stevens Transport Inc., a 1,200-truck Dallas company that burns 600,000 gallons of diesel a month. Stevens has seen the price it must pay for diesel go up from less than $1 a year ago to the current average of $1.41, senior vice president and director Todd Aaron said.

The price of diesel has flattened out in recent months. To Mr. Aaron, though, that is a bad sign. Typically, diesel - essentially the same as home heating oil - goes down in price as summer approaches and there's little demand for heating oil. But this year, diesel has stayed at historic highs, Mr. Aaron said.

"It's very scary that diesel fuel is where it is today as we have the fall and winter months quickly approaching," he said.

To cope, Stevens has invoked clauses in customers' contracts allowing for a fuel surcharge when diesel exceeds $1.10. Most have accepted the increase. However, some customers have canceled their business. Even with the increase, Stevens is recovering only 87 percent of the higher fuel costs, Mr. Aaron said.

He is not optimistic that OPEC's actions will bring petroleum prices significantly lower, since national inventories are depleted.

"If OPEC adds another half a million gallons a day, that's nothing, if our reserves are low. We have to pump our reserves back up. I don't see the price of diesel coming down any time soon, especially if we have a cold winter," Mr. Aaron said.

Cutting into profits

At Henley's Training Academy in Addison, the school isn't training pilots if it isn't burning high-octane, high-priced aviation fuel. A gallon costs $2.80 to $3, and two hours of training in a Cessna 172 burns up about 13 gallons.

Chief flight instructor Trek Moilanen said the school has considered applying a fuel surcharge to cover the extra $5 an hour it costs the school for airplane fuel. For students who are paying over $100 an hour for instruction and airplane, fuel isn't a big part of the costs. For the school, fuel costs - which have increased 50 to 70 cents since last year - play a more important part.

"It's hurting us. It's not hurting a lot, but it's hurting us," Mr. Moilanen said.

At Meals on Wheels Inc. of Tarrant County, the higher fuel prices are hurting both the organization, which has 10 vans to ferry meals, and the volunteers it relies on to deliver lunch to clients in their own cars.

"We're having a terrible time," Meals on Wheels marketing director Pam Moorman said. "As our demand grows, we need more volunteers to help deliver the meals. These gas prices are killing us, because it's making it harder on our volunteers."

Every day, the Tarrant County program delivers more than 2,000 meals, and volunteers donate more than 10,500 hours a month. That amounts to a lot of driving, all at the expense of volunteers, many of whom are retirees on fixed incomes.

Meals on Wheels is pleased to have increased participation by corporations, which rounds up volunteers, she said.

In sheer volumes of fuel usage, it's hard to outdo the U.S. airlines. Fort Worth-based American Airlines Inc. by itself burns about 1 percent of all oil used in the United States daily.

Southwest, which uses about one-third as much fuel as American, paid only 39.32 cents per gallon for jet fuel in the first quarter of 1999. But a year later, that average price was 81.98 cents.

Small wonder that Southwest saw its fuel and oil bill more than double, from $85.7 million in the first quarter of 1999 to $197.1 million in 2000.

When the Persian Gulf crisis sent oil prices soaring in 1990 and 1991, Southwest undertook an effort to bring prices down, and Mr. Crum said many of those steps are being re-examined.

Southwest is asking pilots to pay close attention to the recommended flight plans, in which takeoff, cruise altitude and landing have been carefully calculated to minimize fuel burn. At gates, the airline is trying to use ground air conditioners and power sources rather than the on-board auxiliary power units to keep the airplanes cool and lighted.

Last week, Southwest activated a new computer program, its Fuel Tankering System, to decide where and when Southwest airplanes should add fuel. That's important because the price of a gallon of jet fuel can vary from city to city.

"We feel this program can save us 2 cents a gallon," Mr. Crum said. That's more than $19 million a year at current usage levels.

"The difference now is that fuel prices are going to stay up at that level for a long, long time," he said.