SunJournal.com, ME
11-27-07
Oil prices push costs higher
By Jennifer Waters , MarketWatch
CHICAGO - Let the consumer beware: Costs are going up on almost everything
the average American family consumes.
Blame it on crude oil. The rocketing price of crude oil is not only sharply hiking
the costs of fueling the car and heating the home, but is bidding up prices on the
raw materials that go into goods from produce to perfume.
At the same time, the push to develop ethanol as an alternative fuel through corn
and similar products is inflating the cost of feed for cows, pigs and other farm
animals - and that also increases the prices consumers pay.
"Oil affects everything from top to bottom," said Phil Flynn, energy analyst at
Alaron Trading. "Most people wear crude oil every day."
Consumer-product giants ranging from Procter & Gamble Co. and General Mills
Corp. to Wm. Wrigley Co. and Bridgestone Firestone North America Tire have
warned in recent weeks that the price increases they've already put in place this
year could go higher yet.
"The continuing upward spiral of raw material costs makes this action
necessary," said Duke Nishiyama, president of BFNT.
"This unprecedented situation is simply not one that can be managed through the
enhanced efficiencies and increased productivity that we are continually
implementing at all levels of our company. As a result, we have no choice but to
implement this price increase," he said.
Crude oil is among the most versatile products on earth. It comes out of the
ground as a honey-colored liquid or a tar-black solid, though it can also emerge
as red, green or brown. Refined, it becomes petroleum, rich in hydrogen and
carbon atoms, and familiar to most as gasoline or petrol.
Petroleum was the "snake oil" once thought to have curative powers to heal
wounds. In ancient times it was used to polish swords, grease chariots and
preserve mummies. It wasn't until 1859 that the first successful well drilled
through rock produced "black gold."
It was long popular as the source of kerosene and has been used for asphalt, tar
and heavy lubricants. It's also turned into diesel and jet fuel, heating oil and gas
fuel.
Converted into chemicals, the oil and gas become petrochemicals that are used
to develop plastic, polyester, rubbers, detergent, and chemical fertilizers and
other pesticides. But it's also used in fragrances and lipstick, in candles and
telephones, in pharmaceuticals and insecticides.
Petroleum is used to make artificial limbs and soaps, but it's not used to produce
dairy products. Cows are. But cows need to fatten up before they're milked and
slaughtered, and they're mostly fed a diet heavy on corn. As more corn is
directed to energy production, the price for corn has risen and dairy farmers have
passed those costs up the food chain.
Those higher feed costs alone have infused an extra $47 a year per person into
grocery bills, according to an Iowa State University study in May.
And don't forget: Farmers sow crops with tractors and use trucks to haul goods,
all of which are fueled by diesel. Those higher transportation costs also get
pushed up the food chain.
Consumers at the supermarket check-out counter see that they're paying
sometimes record-high prices for milk, cheese and yogurt at the same time that
the costs of Tide, Pampers, Ivory soap, M&Ms and Cheerios are creeping up.
Consider these recent price hikes:
Wrigley - traditionally conservative on pricing - raised prices 10 percent in the
second and third quarters on its popular gums and candies.
Hershey Co., whose Chief Operating Officer Dave West was one of the few
consumer-product executives to crow that "consumer spending has been up this
year and it's going to be up again next year," raised prices by about a nickel a
candy bar in April. On an earnings call last month, Hershey said it may very well
jack prices again in January when there's a "better view of the commodities
situation."
Kraft Foods Inc. Chief Executive Irene Rosenfeld told investors last month that
she's had to raise prices to cover what food companies call "input costs." Those
are the raw materials used for food as well as resins for containers. Wax, for
example, is used in packaging frozen foods.
Procter & Gamble lifted its prices on Folgers Coffee blends by 8 percent, and by
9 percent on fabric softeners such as the Downy brand. Last month, Chief
Financial Officer Clayton Daley said more price hikes are coming, including a 5
percent to 12 percent increase on Olay and Ivory personal cleansing products in
January; a 5.5 percent rise on Bounty and Charmin paper products in February;
and increases of 5 percent to 9 percent on Pampers disposable diapers and 3
percent to 5 percent on Gillette blades and razors, also in February.
"They are not sticker-shock increases," he said on an earnings call. "Consumers
have seen much larger increases in other things they buy than what they are
buying from us."
Lattes and frappuccinos laced with lots of milk prompted Starbucks Corp. to
boost prices by about 9 cents a beverage earlier this year. That followed one last
October, when Starbucks added another 5 cents, on average, to beverages to
cover the rising costs of labor and energy.
Also last month, Colgate said prices on its Hill's pet food business were headed
higher by 6 percent to 8 percent in the fourth quarter.
General Mills has taken two tracks. One is to raise prices on products like Yoplait
and Green Giant vegetables. The other involves a combination of shrinking the
size of cereal boxes of Lucky Charms, Wheaties and other Big G brands while
increasing the price for each ounce. As a result, shoppers saw the price per box
drop but they got fewer bowls of cereal.
In September, Chief Executive Steve Sanger said he's not afraid to push the
pencil again.
"We are actively monitoring the need to pass along additional input cost
pressures as they arise," he told investors on an earnings call.
Another example of those cost pressures: Farmers' tractors and trucks are
outfitted with tires, the prices of which have jumped. In March, BFNT inflated the
prices of its Bridgestone, Firestone, Fuzion and other tire lines by about 5
percent.
Cooper Tire & Rubber raised its tire prices 5 percent in June and another 4
percent on Oct. 1. Chief Executive Roy Armes said the company will keep taking
the "necessary and appropriate actions" to protect its profit margins.
Though raising prices can turn off customers and push them away from even
favorite items, company executives aren't afraid of a consumer backlash.
"There is not going to be much customer resistance because they are seeing the
same energy and commodity cost increases," P&G Chief Executive A.G. Lafley
told investors.
"We're not talking about high out-of-pocket prices for consumers here, and we're
talking about staples," he said.
Yet, a dime here, a dollar there and it all adds up to more pressure on consumer
spending.