Des Moines Register
11-03-07
Iowans to pay heavily for record-high oil
Crude oil closed at a record price Friday - $95.93 a barrel - amid worries that
growing demand and tensions with Iran will send prices over the $100 barrier.
A majority of analysts surveyed by Bloomberg News predicted that prices may
rise next week on speculation that OPEC won't increase production as fast as
consumption grows this winter.
Crude oil for December delivery rose 4.4 percent this week on the New York
Mercantile Exchange. At the pump, the average price of unleaded gasoline rose
to $2.901 Friday in Iowa, up 17.6 cents from a month ago, according to AAA.
Crude prices are within the range of inflation-adjusted highs set in early 1980.
Depending on how the adjustment is calculated, $38 a barrel then would be
worth $96 to $103 or more today.
We asked business people and experts how $100 oil would affect Iowa's
economy and their businesses.
TRANSPORTATION
Robert Sturgeon, chairman and owner of Barr-Nunn Transportation, a Grangerbased trucking company, said shipping costs are part of every item that
consumers buy.
When fuel prices rise, truckers pass some of the additional cost on to their
customers. Those customers, in turn, pass the additional cost on to the
consumer of the goods being shipped, Sturgeon said.
"In the end the consumer, which is all of us, ends up footing the bill for higherpriced crude oil," Sturgeon said.
The additional expense on those goods means consumers have less money
available for other goods and services and economic growth slows, he added.
"A slower-growing economy has a depressing effect on all business, including
truckers, and the cycle continues," Sturgeon said.
CONSUMERS
Discretionary income has dwindled. The pinch has been felt especially by smallbusiness owners, said Joel Carter of Iowa Falls State Bank.
"The local coffee shop, which is a popular outing in Iowa Falls, has seen sales
decline steadily, and this follows with most businesses across the spectrum."
However, he said the drop in consumer spending has not been nearly as
dramatic as the 75 percent increase in crude oil prices this year. Consumers
yearn to maintain their lifestyles, he said, and economic indicators reflect this
steadiness. And that in itself concerns Carter.
"What is worrisome most of this surge in oil prices is to what extent are
consumers willing to go - including mortgaging their future financial well-being to maintain their current standard of living."
"The skyrocketing energy cost is bound to negatively affect the economy," said
Ismael Hossein-zadeh, a professor of economics at Drake University. He cited
calculations by energy consultant Peter Beutel that consumers will spend $100
million a day more on gasoline in early November than at the start of October.
This means Iowa will have approximately $1 million less available per day for
other goods and services - including holiday shopping.
He pointed out that the impact may be less severe in Iowa than in Michigan, Ohio
or other states where energy-intensive manufacturing is more prevalent.
Some of the products sold at Hy-Vee stores are contained in packaging made
with petroleum byproducts, said Chris Friesleben, a Hy-Vee spokeswoman.
Prices of those products will increase as the cost to produce them rises, she
said.
"We don't immediately pass on our increased costs to consumers; we do as
much as we can to trim overhead in other areas," she said. "But if oil prices
continue to rise, we're eventually going to run out of wiggle room and will have to
- however reluctantly - raise prices."
The company's trucks run on diesel fuel, the price of which is also expected to
increase, she said.
ETHANOL PRODUCERS
Higher costs of crude oil probably will lead to higher natural gas prices, said
Jennifer Moehlmann, Des Moines-based energy management group leader for
Sebesta Blomberg, an energy consulting company.
That will lead to higher costs of production for most ethanol companies, which
use natural gas for energy. Natural gas is the second-biggest expense for an
ethanol plant after corn, Moehlmann said.
Bernie Punt, general manager at Siouxland Energy and Livestock Cooperative in
Sioux Center, said higher crude oil prices might boost demand for ethanol since
ethanol prices are relatively cheap compared with gasoline now.
PRICE AT THE PUMP
Here's an easy rule of thumb from Michael Swanson, senior agricultural
economist at Wells Fargo & Co.: Every $10 increase in the price of a barrel of oil
translates to a 34-cent-per-gallon boost in the cost of gasoline.
"It does add up," he said. And it has been particularly tough on lower-income
individuals, who have less disposable income.
Jason Sagebiel, risk management consultant in the Renewable Fuels Group at
FCStone in West Des Moines, said ethanol prices used to follow the gasoline
market.
However, he said, because of more ethanol production coming on line recently,
the price of ethanol and the price of gasoline have diverged.
"There is less of a relationship between ethanol prices and gasoline prices than
there used to be," Sagebiel said, "but there still is a relationship because they are
both energy products."
"So many consumers have made the adjustment already. What's the story? This
has been going on for a year and a half," said Nancy Dunkel, Dubuque market
president of Fidelity Bank & Trust and past chairwoman of the Iowa Bankers
Association. "People have already made big adjustments."
She believes that consumers have slowed their spending on items such as dining
out to make room in their wallets for increased fuel prices.
MANUFACTURERS
Bob Janeczko, president of I2tech (Innovative Injection Technologies), a West
Des Moines maker of plastic components, said any increase in the price of a
barrel of oil means more costs for materials because plastic is petroleum-based.
"The double whammy that most people don't think about in our global markets is
the weakening of the U.S. dollar against other world currencies, especially the
Canadian dollar, the pound sterling and the Euro," Janeczko said.
A weaker dollar means U.S. companies pay more for crude oil, compared with
many foreign competitors, Janeczko added.
Compared with a year ago, the price of crude oil in U.S. dollars has increased
43.9 percent, but the price in Euros has increased only 26.5 percent, Janeczko
said. The higher cost in dollars decreases I2tech's competitive advantage with
Europe and other global competitors, Janeczko said.
AGRICULTURE
Michael Duffy, Iowa State University Extension economist, said higher crude
oil costs will translate into at least a 7 percent increase in the cost of running farm
machinery for Iowa farmers.
"It's such a volatile situation (with crude oil prices) that's as good a guess as
we've got right now," Duffy said.
Other prices paid by Iowa farmers are going up at a higher rate than fuel, he
said. Higher costs of seed, fertilizer and farmland rent are projected to boost crop
production costs by a total of 15 percent, Duffy said.
"The increase in the price of fuel is just another stick in the eye" for farmers, he
said.
S.P. Dinnen, Patt Johnson, Jerry Perkins, William Ryberg and Donnelle Eller
contributed to this story.