(The following article by Tom Belden was posted on the Philadelphia Inquirer website on May 3.)
PHILADELPHIA — As bad as a motorist may feel paying $50 or more to fill the gas tank of the family car, imagine if your job were to keep hundreds of airplanes flying, or a fleet of trucks on the highway.
Airlines, trucking companies and railroads are among the industries that have been hit hardest by the recent rise in fuel prices. Big manufacturing companies say they are not experiencing as much anxiety – yet. But as energy prices fluctuate wildly, managers in many industries must go back to their spreadsheets, recalculate their costs, and reevaluate their operations.
Crude oil for June delivery reached a record $75 a barrel April 21, and some analysts have warned that the cost could reach $100 a barrel later this year. Oil closed yesterday at $74.61, up 91 cents. Still, oil prices are 38 percent higher than they were a year ago.
Gasoline prices were hovering around $3 a gallon in the Philadelphia region, according to AAA Mid-Atlantic, and averaged $2.91 a gallon nationwide.
Oil costs are being driven up by a combination of strong global demand; limited production capacity, especially since last summer’s hurricanes hit the Gulf Coast; and geopolitical uncertainty, led by the United Nations’ diplomatic standoff with Iran over its nuclear ambitions.
Here is a look at how some major industries are being affected:
Moving people
Airlines are feeling the effects of the latest price increases as much as or more than any other industry.
Unlike some freight transportation companies, which have contracts that let them pass on higher fuel costs to customers, airlines swallow most of the higher expense – and hope they can make up some of it by raising fares later.
Adding to the burden is that the price of jet fuel, which costs more to refine than gasoline, has risen faster than motor-vehicle fuel. Spot prices for Gulf Coast jet fuel last week averaged $2.50 a gallon, and U.S. carriers used 19.9 billion gallons of the stuff in 2005, airline industry officials said.
According to the Air Transport Association, the major carriers’ trade group, every penny increase in jet-fuel prices costs U.S. airlines an additional $199 million.
By last fall, for the first time, fuel had overtaken labor expenses as most major airlines’ single largest cost category.
“Simply put, today’s jet-fuel prices are crushing and could prove a knockout blow to some,” association vice president and chief economist John Heimlich said.
Airlines have had no choice but to raise fares in several small increments since last fall, and analysts expect them to rise again this year.
“Airlines have cut lots of costs and become more efficient, but fuel costs have overwhelmed those savings,” said David Swierenga of AeroEcon, a Vienna, Va., aviation consulting firm. “They are still losing money this year, although not as much as last year.”
Hauling freight
With fuel accounting for as much as 25 percent of total operating costs, the recent price increases have hit the trucking industry hard. The 37,000-member American Trucking Association last week revised its 2006 fuel-cost forecast. It now believes the trucking industry will spend $94.3 billion on fuel this year, a $6.6 billion increase over the $87.7 billion spent by trucking in 2005.
Tiffany Wlazlowski, the trade association’s public affairs director, said the industry was taking a variety of steps to cope with the increases, including bulk fuel purchases and route consolidation.
The Norfolk Southern Corp. rail unit, which consumes 40 million to 50 million gallons of diesel fuel every month, has been installing automatic devices that shut down locomotive engines after 30 minutes of idling, said spokesman Rudy Husband.
The railroad is also installing computers that calculate topography, track curvature, the train’s weight, length and other factors, and tell the locomotive engineers the most fuel-efficient speed, Husband added.
James P. Storey Jr., president of Quaker City Produce Co., said soaring fuel prices would mean higher fruit and produce costs. At the peak of last year’s summer growing season, a California-to-Philadelphia shipment cost as much as $7,000 to haul, and it could go higher next year.
With new federal limits on the number of hours a driver can be on duty each day, independent truckers are less willing to make multiple stops to get a full load on the truck. “At each cooler [where drivers pick up produce and fruit], they could have 100, 200 trucks ahead of them, so they sit five hours waiting to get loaded,” Storey said. “Two stops can kill a whole day.”
With fuel prices so high, Storey said, it is harder to afford having the truck leave without full loads.- Henry J. Holcomb
Building headaches
The construction industry is also bracing for the worst. Kenneth D. Simonson, chief economist at Associated General Contractors of America, said his members “use fuel for pushing dirt, lifting things. There is a lot of equipment at every construction site that uses fuel.” The industry is also paying high fuel surcharges “on thousands of deliveries to sites and movement of debris from the sites.”
Many materials used in construction are costing more, he said. “Steel costs are starting to go up. It takes a lot of fuel to gather ore or scrap iron and transform these ingredients into finished steel,” Simonson said.
“Asphalt costs are rising dramatically,” he added, “driving up paving costs.”
He predicted that construction costs could rise an additional 10 percent this year, but warned: “My crystal ball gets totally coated with oil. So I’ve regularly been wrong on what will happen to oil prices.”
– Henry J. Holcomb
Detroit’s gas pains
Early vehicle-sales numbers for 2006 suggest prices will have to go higher for American consumers to flee gas-guzzlers en masse.
“We don’t predict any vast defections from any of the segments,” said Jack R. Nerad, executive market analyst for vehicle-sales research firm Kelley Blue Book.
“There will probably be movement from truck-based SUVs to car-based SUVs… . Overall, we think it would take significantly higher-level gasoline prices over a sustained period, or the lack of supply,” to bring about a massive change in consumer buying, Nerad said.
General Motors Corp. seems to have the most at stake if gasoline prices sustain or surpass their current heights. GM has been betting on strong sales of its new GMT900 series, large-size, high-profit SUVs, to shore up its ailing finances. SUVs based on the platform include the Chevy Tahoe, GMC Yukon and Cadillac Escalade. GM moved nearly 96,000 of the heavy vehicles between January and March.
Japanese manufacturers Toyota, Honda and Nissan also make large SUVs, but their profit is spread out more evenly among their product portfolios, including trucks, sedans and compact cars.
Full-size SUV sales have remained stable, many analysts say, because people who buy them have no replacement vehicle that suits their lifestyle, which may include carrying many passengers and towing boats or trailers.
That said, fuel efficiency – from gasoline-electric hybrid vehicles in particular – is a feature starting to resonate among prospective auto buyers, on par with performance and carrying capacity.
ABI Research predicts that by 2010, 5 percent to 6 percent of all cars sold in the United States will be hybrids. In 2005, they represented 1.2 percent of the total vehicles sold.- Akweli Parker
Manufacturers wait it out
The run-up in oil and gasoline prices has not shaken the confidence among big-company manufacturing executives in the economy. But they admit there is a tipping point at which consumers will feel threatened.
They say the spike in natural-gas prices and the uncertainty over the damage to the nation’s refining capacity after the 2005 Gulf Coast hurricanes were more devastating than the recent action on petroleum.
Many of the nation’s factories are powered by natural gas. Natural gas is also a feedstock of raw materials for many chemical plants. Natural-gas prices were averaging $7.20 per million BTUs last month, which is high for the season. At times in late 2005, natural gas sold for $14 to $15 per million BTUs.
DuPont Co. reported that first-quarter raw-material costs – which are heavily influenced by petroleum – rose $350 million. The chemical company recovered some of the higher raw-material costs through price increases, and many of the larger oil-price jumps happened in April – after the close of the books on the first quarter.
“There’s a sensitivity to rising prices, and if that hurts your customers, that’s not a good thing,” said Carl Lukach, vice president of investor relations.
But prices have been increasing for about two years, and they are not a surprise to other businesses, Lukach said.
General Electric Co. chief executive officer Jeffrey Immelt said last week that higher oil and gasoline prices were expected to add $150 million to GE’s costs in 2006.
But he said the company was simply “not seeing” a retreat by businesses or consumers because of high oil prices, which he describes as an outgrowth of a strong global economy.
The company is watching how people respond to gas prices, he said.
“At $75 [per barrel], do we cross the threshold where lower-income people that still have jobs come out of the market and don’t buy refrigerators and don’t buy cars?” Immelt asked rhetorically. “We haven’t reached that point yet.”