High fuel rates hurting oil-dependent industries unable to pass them on to customers

Thursday, March 23rd 2000, 12:00 am

By: News On 6

Abe Haddad sees the higher gasoline prices every time his Smith Limousines fills up one of its 15 limos, minibuses or vans. And, unfortunately for him, the high prices go no further.

Like many business people, Mr. Haddad says competition keeps him from passing his increased expenses along to customers.

"We hope the prices are going to go down," Mr. Haddad said. "It just eats into our profit.
What else can we do? We don't want to raise prices. The mom-and-dad operator, the one-car operator, can undercut our prices to get the job."

It's a refrain heard from many business people trying to cope with the sudden spike in crude oil prices that has seen gasoline go up more than 50 percent in the last year and other oil-based products show sharp increases.

Every time the family car has to be filled up, the average person knows well that higher oil prices cause pain in the pocket.

But the greater hurt is being felt by industries where oil plays a more integral part than just the daily commute.

After falling below $11 a barrel on futures markets 15 months ago, crude oil prices have risen steadily after the Organization of the Petroleum Exporting Countries agreed a year ago to restrict production. Oil prices have increased tremendously in the last 15 months, topping out at $34.13 a barrel in futures markets on March 7.

Expectations that OPEC will raise production next week have helped send prices lower in the two weeks since, and they fell to $27.46 on Wednesday. But that still represents a sharp rise from a year ago, when oil was selling in the low to middle teens.

That increased price for oil is boosting the cost of doing business throughout the economy, affecting gasoline, diesel and jet fuel for transportation as well as products that use petroleum in their manufacture.

Not passing it on

As a rule, manufacturers haven't raised prices to reflect their cost increases, a recent survey by Dun & Bradstreet found. Instead, they are taking the hit on their bottom lines.

"Despite surging input costs brought on by the hike in oil prices, manufacturers have not yet begun to raise prices," said David T. Kresge, D&B's vice president and chief economist.

"If oil costs subside in the next few months, prices for manufactured goods should hold steady. But if oil costs remain at current levels or continue to climb, manufacturers -- especially those with high energy costs -- will see slimmer profits or be forced to pass those costs along to their customers."

Randy Milner, Southwest regional sales manager for Detroit-based Tool Chemical Co., said the price of the plastics that Tool Chemical buys has been rising steadily for two years, but the company can't pass the increases along to customers. The plastics business is too competitive, he said.

"If I raise prices, my competitor can go in and cut prices," said Mr. Milner, whose company sells plastic board used to create models of everything from machine tools to automobiles.
"I think we've had one price increase in six years. It's basically having to hold the line on prices because of competition. That's what competition does for you," he said.

Hot Line Couriers, a Dallas business with cars and trucks constantly in motion, has seen its diesel bill double and gasoline costs also go up drastically.

So far, it's coming entirely out of profits, said Kelly Davis, director of operations.

"Our industry is so competitive that it's really kind of hard to raise prices," Mr. Davis said.
That leaves the courier company stuck. "There's nothing we can do about it. We can't just close our doors. We have to grin and bear it, and hope that it'll come back down or that the economy won't suffer over it," he said.
The average motorist has to worry about filling one or two gas tanks.

Mr. Haddad's employees must fill 15 gas tanks, often daily. The least thirsty of his vehicles are the limousines that can get 15 miles per gallon. His vans and minibuses average 7 to 8 mpg.

The net result is that Mr. Haddad's company, many of whose customers are corporations with contracts, is absorbing an extra $1,500 to $2,000 a month in fuel costs.

Sticker shock

Although oil prices have risen steadily for more than a year, their impact can still bring sticker shock. When Jim Gentry of Gentry's Asphalt received a bill from his asphalt supplier recently, he thought the supplier had made a mistake.

But the bigger bill was no error -- it carried the wallop of higher oil prices working their way from the wellhead through the various middlemen and finally to Mr. Gentry's paving jobs. The cost for asphalt jumped from $19.50 a ton to $22.50, a 15 percent increase that can raise the cost of a residential driveway by $100 or a large commercial paving job by $3,000 to $4,000, he said.

"At this time, we've kept our same prices. We've not made adjustments yet, but I feel sooner or later we're going to have to make some because it really makes a difference on some of the bigger jobs," Mr. Gentry said last week.

The rising prices carry the risk of pushing economies into recession, particularly in the recovering Asia-Pacific area or in the United States, suggested energy analyst Chris Pashley of the British-based consultants Gaffney, Cline and Associates. However, he said OPEC leaders are likely to raise production at OPEC's meeting March 27 and stop the rise of crude oil prices.

"I think there will be effects, and some of that will be in the inflation rate. But that will be short term, and oil will come back down and hopefully we'll see prices come back down," Mr. Pashley predicted.

Efforts to pass on the costs have been mixed. U.S. airlines have increased fares or added fuel surcharges in some instances but failed in several other efforts to raise fares to compensate for higher jet fuel prices. The Air Transport Association, a trade group for the nation's carriers, forecast last week that higher prices for jet fuel will increase the industry's costs by $4.4 billion in 2000, to $14.6 billion. In 1999, the industry posted a net profit of $4.85 billion.

"The airline business is always one of small profit margins that in the best of times run between 2 and 5 percent," said David A. Swierenga, the association's chief economist. "So when we see fuel costs going up almost as much as the previous year's net profit for the entire industry, we are extremely worried."

Tom White, spokesman for the American Association of Railroads, said fuel makes up 6 percent of a railroad's budget. As a rule, railroads use less fuel than trucks, their main competitor, to carry equal amounts of freight. Even so, the rising fuel prices are "pretty painful," Mr. White said. "We use about 31/2 billion gallons of fuel a year. That's an awful lot of oil."

Considering that the price of a gallon of diesel has jumped from about 95 cents to $1.50 since Jan. 1, 1999, that's a big added burden.

The increases are hitting not only private business, but also governments and their garbage trucks, police cars, tanks and battleships. The House Appropriations Committee recently approved $9 billion in supplemental appropriations for military operations in the current fiscal year, with $1.6 billion of that earmarked to cover the military's skyrocketing fuel costs.

Pentagon spokeswoman Susan Hanson noted that President Clinton's defense budget request for fiscal 2001, which begins next Oct. 1, included a $1.4 billion increase in the fuel budget over previous estimates.

Retailers in some industries are finding that the price increases are starting to come at them at a dizzying pace. Dodd Dodson, vice president of Buckley Oil Co. of Dallas, said that its solvent suppliers are sending them bad news regularly.

"For the last eight months, we've had price increases almost every month to every other month. Now we're getting them every week to two weeks. We've never seen anything like it," Mr. Dodson said.

In the company's finished lubricants, suppliers raised prices in October and February and have warned that another increase is coming, Mr. Dodson said. "It's a terrible situation."
Mixed blessings

The higher fuel prices provide a mixed blessing for some companies.

Greyhound Lines Inc.'s fuel bill climbed $1.5 million in February. But fuel makes up only about 3 percent to 4 percent of Greyhound's operating expenses, compared with 15 percent or more for airlines.

"Not only are we in a better position to the airlines, but also the private car," Greyhound spokesman George Gravley said. "People who own a private car may decide it's cheaper to ride Greyhound than to drive their car."

As a result, Greyhound had its best February in about 15 years last month. Greyhound raised its fares 50 cents to $2 one way two months ago, but sales still rose in February.
"On a relative basis, we're not hurt nearly as much by rising oil prices. We get hurt more when oil prices go down," Mr. Gravley said.House considers measure aimed at oil price-fixing.