The ripple effect
Source: Tulsa World
Publication date: Feb 27, 2000
The cost for a fresh coat of paint could get more expensive if oil prices continue to flutter at high levels, said Chip Meade, president of Anchor Paint Manufacturing Co. of Tulsa.
In recent months, the company's manufacturing and shipping costs have risen between 2 percent and 5 percent because of surging oil prices. Meade said he'll have to pass the additional costs on to customers.
Higher prices for other retail and wholesale products may follow, as the ripple effect of high oil prices widens. Such price increases may be needed to cover higher transportation costs, the result of rising diesel-fuel prices.
Some economists say if the cost of oil and fuel remains high, the subsequent chain reaction could send inflation spiraling upward.
Anchor Paint is beginning to feel the squeeze of rising energy prices, Meade said.
"Many of the raw materials used to make paint are derived from oil," he said.
Consequently, the cost of those supplies has risen. In addition, the trucking company that ships Anchor paint products recently added a 5 percent fuel surcharge to Anchor's transportation costs.
"We ship paint every day, probably 5,000 gallons a day," Meade said.
On Feb. 14, crude oil rose above $30 a barrel on the New York Mercantile Exchange for the first time since the eve of the 1991 Persian Gulf War. On the same day, the average price for Oklahoma sweet crude, the state's most plentiful grade, jumped to a nine-year high of $27.50 a barrel.
A week earlier, the retail price for a gallon of self-serve unleaded rose to a nine-year high of $1.34. Since then, the average pump price for self-serve unleaded has risen to $1.37 nationwide, according to the latest survey by the American Automobile Association.
Last week, most gas stations in Tulsa were charging $1.34 per gallon, up 23 percent since the beginning of the year, when the average price hovered around $1.09.
The reason: Low inventories, high oil prices and a strong demand for heating oil in the frigid Northeast.
A colder-than-normal winter in the Northeast created a huge demand for home heating oil, which cut into the production of gasoline at U.S. refineries, said Dennis O'Brien, director of the Institute for Energy Economics and Policy at the University of Oklahoma.
"Those refineries cannot make enough heating oil on a daily basis to meet peak demand during a cold winter," O'Brien said.
The shortfall of refining capacity led to widespread shortages of heating oil this winter.
The Organization of Petroleum Exporting Countries could end the steady surge in energy prices if it decides during its March 27 meeting in Vienna to increase production. A vote to increase production is expected.
"I think the temptation to slip crude into the market is very great for any producer," O'Brien said. "I don't think that they are going to be able to resist the temptation."
OPEC began cutting oil production last March to eliminate excess oil supplies and revive prices. Since implementing those cuts, oil prices have more than doubled, and world oil stocks have fallen to levels low enough to cause concern about supply shortages.
Efforts to increase OPEC's production may not be enough to avert temporary shortages, some analysts have said.
Inflationary adjustments are inevitable when oil prices rise above normal levels, but today's stronger economy can absorb the higher prices, O'Brien said.
"A tremendous amount of wealth has been created in this country," he said. "People's incomes have gone up considerably."
Consumers are still buying those gas-guzzling sport utility vehicles and the economy is no longer driven by the energy industry, he said.
Oil accounts for less than 3 percent of the nation's gross domestic product, down from 8.7 percent in the late 1970s. Technology and the Internet fuel America's economy, not oil, O'Brien said.
"People have more disposable income today," he said. "They can afford the higher prices."
Some people hardly blinked when confronted with today's pump prices, which seems to support O'Brien's theory.
"I haven't noticed it yet," said Toni Garner, owner of Toni's Flowers and Gifts in Tulsa.
Garner's business operates three vans and makes 75 to 100 deliveries each day. She said her monthly gasoline bill is between $500 and $600.
Although pump prices have nearly doubled over the past year, Garner said she wasn't too concerned about the increased cost.
"I don't think it will be that much of an increase," she said. "I'm going to have to bear it."
O'Brien noted that the price of oil is based on the perception of a handful of traders, not reality.
"Oil prices are basically set by people's perception of what the future market is," he said.
Independent oil producers in Oklahoma like the high price for crude, but they still have little faith in its stability.
"The sharp increases and decreases in the price make it very difficult to do long-range planning," said
Dewey F. Bartlett Jr., president of Oklahoma Independent Petroleum Association. "Stability is what I would like to see."
Last week, OPEC oil ministers indicated they would favor a slight increase in production, one that would keep oil prices hovering around $20 to $25 per barrel.
But some industry observers believe a production increase by OPEC won't offer motorists immediate relief from high gasoline prices. Some say high pump prices will linger for several months.
"I would not be surprised to see gasoline prices climb an additional 30 to 40 cents per gallon nationwide," said Dan Davis of DataStream Market Intelligence, a Tulsa-based business that tracks gasoline prices in markets nationwide.
If OPEC does increase production, it would take more than a month for pump prices to reflect the change, Davis said.
"Any increase in production will probably be too late to result in reduced gasoline prices in time for summer travel," he said. Many factors can influence gasoline prices
Gasoline prices have surged as high as $1.55 per gallon in some parts of the country, but recent increases at the pump have been based primarily on psychological factors, industry observers say.
"It hasn't been based on cold, hard economic facts," said Chuck Mai, spokesman for the American Automobile Association in Oklahoma.
Pump prices used to be controlled by marketplace factors, such as supply and demand and other economic indicators, Mai said. That changed when Iraq invaded Kuwait 10 years ago and boosted gasoline prices. "It seems like it's a knee-jerk reaction," he said.
OPEC's yearlong effort to reduce oil production has had a similar effect on pump prices, Mai said. The Organization of Petroleum Exporting Countries is expected to increase production after its March 27 meeting in Vienna, Austria.
"Once the flow resumes, we'll see the same psychological factors come into play and prices will ease back down," Mai said.
Last week, Oklahoma motorists were paying an average of $1.35 for a gallon of self-serve unleaded. In Oklahoma City, the average price was $1.33. The most common pump price in Tulsa was $1.34 a gallon.
Motorists in Oakland and San Jose, Calif., were paying an average of $1.55 a gallon. People in Newark, N.J., and Fort Worth, Texas, paid $1.31 a gallon, according to Tulsa-based MPSI Systems Inc., which tracks fuel prices in national markets.
"One of the most common reasons for fuel prices to change at the pump is the balance between supply and demand," said MPSI's Carlos Palma. "When the production of crude oil diminishes or oil reserves drop below certain levels, the tendency is for the price to rise."
But street-corner competition also plays a role in fluctuating pump prices, which may explain why prices in
Tulsa jumped from $1.09 to $1.17 per gallon one day in mid-January.
Pump prices are expected to fall over the next few months, Mai said.
Russell Ray, World business writer, can be reached at 581-8380 or via e-mail at russell.ray@tulsaworld.com.
Publication date: Feb 27, 2000
) 2000, NewsReal, Inc.
http://beta.newsreal.com/cgi-bin/NewsService?osform_template=pages/newsrealStory&ID=newsreal&storypath=News/Story_2000_02_28.NRdb@2@1@3@187&path=News/Category.NRdb@2@7
-- Carl Jenkins (Somewherepress@aol.com), February 28, 2000
