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Oil, natural gas price rise is felt by nearly everyone


Joe Tomarchio is paying a lot more for tires. Gene Mullinix is paying a lot more for fertilizer. Terry Alexander is paying a lot more for roofing.

High energy prices have a hidden cost.

Oil and natural gas aren't just fuel for automobiles and furnaces; they are also key ingredients in tens of thousands of everyday items, from plastic to pantyhose, computers to crayons, shaving cream to surgical equipment. And manufacturing anything with petrochemicals is more expensive with both energy sources hovering near record highs.

Petrochemical feedstocks - the raw materials - were 30 percent more expensive in April than they were a year before, said Kevin Swift, chief economist of the American Chemistry Council.

"It's an extremely frustrating time," said Jarrett Leeb, executive vice president of Owings Mills-based Jarrett Industries, a packaging consultant that annually buys hundreds of thousands of plastic bags, which are about 35 percent more expensive than they were last year. "Extremely frustrating."

Businesses such as Jarrett, in Maryland and nationwide, are feeling the pinch as the impact ripples through the economy. The effect on consumers' energy-walloped wallets depends on the product. Some costs are being passed through and some aren't.

Christopher Steg paid $500 more in materials than he would have a year ago for the newly finished roof on his new Bowleys Quarters home, but he feels fortunate. If he hadn't arranged the project months in advance with Alexander's Essex Roofers and more or less locked in a price, it would have cost him nearly $3,000 more.

Steg isn't surprised - his machine shop in White Marsh uses oil as a cutting lubricant, so he knows all about energy prices' impact - and he's not expecting relief from rising prices.

"I think it's definitely the way it's going to be from now on," Steg said. "I don't see them coming down, not as fast as the world demand is growing."

Crude oil prices have averaged $50 a barrel this year, up from less than $15 in 1998. Natural gas prices have tripled, selling for more than $6.50 per million BTU this year.

The U.S. Department of Energy, echoing Steg, warns that prices are likely to stay high because of strong demand for a limited supply, particularly in this country and in quickly developing China.

Pass on costs

"Our forecast for the next couple years has prices averaging pretty close to what they are now," said Jonathan Cogan, energy information specialist at the Energy Information Administration.

High energy costs affect nearly everyone because it's more expensive to transport goods and people. But more expensive energy has an especially big impact for anyone who relies on petrochemicals to make a living.

Chemical companies have been successfully passing on their costs, said Bill Selesky, who covers the industry for Argus Research Corp., so some businesses down the line have hard choices to make.

Building blocks

"Everything we touch these days ... has a beginning somewhere in the petrochemical chain," said Charlie Drevna, director of advocacy for the National Petrochemical & Refiners Association, an industry trade group. "They are the basic building blocks."

Mullinix, a farmer in western Howard County, grows corn and soybeans, both of which need nitrogen fertilizer, a natural gas derivative that costs 25 percent to 30 percent more than it did last year, about $50 extra per ton. And his equipment is fueled with diesel.

"The farmer is ... catching it both ways," said Mullinix, who also sells fertilizer. "Biggest jump that I saw in production costs since I've been in business."

Farmers are in a tight spot. They don't have the power to demand a higher price simply because their costs have risen. Not only that, prices are being driven down because last year was such a productive one for corn that there's a surplus.

Mullinix thinks many farmers will lose money this season.

Then there's Life-Like Products LLC in Baltimore, which primarily sells picnic coolers made of plastic foam, a petrochemical product. The company is paying more for the foam, more for the natural gas needed to produce the steam that turns the foam into moldable shapes - and on top of it all, more to ship products in and out.

"We're being squeezed," said Chief Financial Officer Herb Burk, who thinks the company will have to raise prices this year.

Mr. Tire, a retail chain based in Lansdowne, is seeing big increases from manufacturers every few months. This month, the wholesale cost is rising 5 percent to 9 percent, said Tomarchio, one of the founders of the company, a subsidiary of Monro Muffler Brake Inc.

"We haven't seen these kind of ... numbers since the '70s when we went through the first oil embargoes," said Tomarchio, chief operating officer of Monro's tire division. "They've taken some quantum leaps."

He figures the June increases will cost the company an average of about $5 to $7 a tire, but he's trying to absorb it and cut costs elsewhere. Premium products might cost a few dollars more, he said, but it doesn't pay to charge consumers more for entry-level tires.

Absorbing costs

"The competition is so tough, it's hard to squeeze it out the other side," Tomarchio said.

Jarrett Industries, which buys packaging from manufacturers for other businesses, has been able to keep its profit margins stable by passing along some of the increases to clients and splitting the manufacturing process among several vendors for the lowest cost.

Leeb figures that a 100,000-bag order of polyethylene resin that would have cost him $30,000 at the beginning of last year now costs $40,500.

Most of the petrochemical price increase is being absorbed somewhere in the business chain, economists say. Otherwise, the cost at the cash register would be spiraling upward. The Consumer Price Index, which tracks the expense of commonly purchased goods and services, is about 3.5 percent higher than it was last year.

High demand

"We don't feel that this kind of cost pressure is going to find its way down to the consumer, unless you're talking about things like gasoline," said Frantz Price, managing director of industry practices for Global Insight, an economic and financial forecasting company with headquarters in Boston.

But price increases are clearly being passed through in some cases, roofing for instance. The most commonly used product for residential and commercial projects is asphalt, and that costs end users 10 percent to 15 percent more than it did last year because it's a crude-oil derivative.

The cost of polyisocyanurate insulation, typically used for commercial roofing jobs, is also rising, partly because of energy costs and partly because demand for its key petrochemical ingredient is high.

Escalation clauses

Gooding Delaware Inc., a commercial roofing and specialty contractor that works in Maryland and nearby states, is including escalation clauses in its project proposals because prices are rising so quickly.

The company is also buying extra insulation and storing it in rented warehouse space to stabilize the price and cut down on the wait, Vice President T. Paul Farrell said.

"We've seen some massive increases," said Alexander, president of Essex Roofers, which handles residential work in the Baltimore area. "And we were told by our suppliers just to keep expecting them."

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