Prices of Oil-Based Goods Start to Rise : LUSENET : TB2K spinoff uncensored : One Thread

Prices of Oil-Based Goods Start to Rise Source: Knight Ridder/Tribune Business News Publication date: 2000-03-31

Mar. 31--From bubble wrap to carpet to plastic hangers, products made from petroleum are getting painfully pricey.

However, while manufacturers and wholesalers have been grappling with soaring costs for months, in many cases their customers are only now paying the price.

Advanced Excelsior, a Houston company that makes bubble wrap and packing peanuts, has watched the cost of plastic resin shoot up 82 percent in the last year.

Until now, it has been unable to raise prices because it competes with much bigger companies that bought huge amounts of resin while it was cheap.

"We can't hold out any longer," however, says Advanced Excelsior's owner and president, Don Rauscher.

This week, the company is sending letters informing customers it is raising prices 10 percent and tacking on a fuel surcharge of $5 per order. Buyers such as the stores that pack and mail parcels for consumers are about to experience the trickle-down effect of higher oil prices.

"Companies like us have been reluctant to raise our prices because everyone's been saying there's no inflation, and our customers have been hearing that," Rauscher says. "We all thought these increases would be short-lived like they usually are, but it's 2000, and that hasn't happened."

With oil selling for twice as much as it did a year ago and OPEC unwilling to crank up production enough to make a big difference, economists are keeping a watchful eye on inflation even though most consumer prices have held steady.

Earlier this month, the producer price index, which tracks wholesale prices for thousands of items, rose 1 percent -- the biggest monthly increase in nearly a decade -- mostly because higher fuel costs have driven up the cost of transporting freight.

Petroleum products made some of the biggest gains. The price of vinyl is up 59 percent from a year ago; plastic pipe, up 20 percent; and asphalt, up 14 percent.

Because of competitive pressures, however, the prices of some petroleum products, such as polyester, have remained the same or even dipped.

Bill Gilmer, an economist with the Federal Reserve in Houston, says the wholesale index recorded big price increases on basic petrochemicals such as polyethylene but not on the final products made from such chemicals, including shower curtains and squeeze bottles.

"Maybe higher consumer prices are in the pipeline, and they're going to start showing up in the indexes," says Gilmer. "But it's a very competitive situation out there for retailers, and we do not usually see these costs passed through to the consumer. You see them show up at the gas pump, but you don't see them spread."

When the Organization of the Petroleum Exporting Countries first cut back oil production last spring, most economists predicted that consumers would never feel the pinch, says Anthony Chan, an economist with Banc One.

Competition would force manufacturers to bear the brunt of the price increases, and increased efficiencies on the production line would help them survive, the economists thought.

If manufacturers and wholesalers are starting to pass on their higher costs, and if OPEC's members stick to production limits they agreed on this week, consumers should brace for inflation, Chan says.

"If OPEC doesn't have cheaters pumping more than they're supposed to, buyer beware -- because the little price increases you're seeing now are likely to spread," he says.

Chan for one is skeptical that OPEC producers will stick to their quotas. On the other hand, even if oil prices head down again, the companies that turn oil into petrochemicals are not expected to institute a broad wave of price cuts.

The prices of their products are set based on supply and demand for the specific chemicals rather than the price of the feedstocks used to make them.

Neal Maddin, a plumbing-supply wholesaler, says he's not one to follow OPEC's every move -- "Even if I kept up, there's nothing I could do about it" -- but he knew trouble was around the corner when OPEC's production cuts last spring ignited gasoline prices.

"When you see prices go up at the pump, you can bet my costs will follow suit," says Maddin, owner of Southmore Plumbing Supply in Houston.

Maddin now pays 25 percent more for PVC pipe than he did before his costs began rising six months ago.

The plumbers who buy supplies from him haven't had to absorb the full increase because of competition, but they will when big suppliers deplete their cheaper inventory and start paying more for PVC themselves.

"You have to pass on the increases," he says. "Eventually you have to catch up. You just have to."

However, that's nearly impossible in especially competitive markets. Prince Plastic, a small Houston company that makes plastic grocery bags, has seen the price of the raw plastic it uses nearly double. Competition from bigger companies with lower-cost inventories, however, has kept it from passing along much of the increase to grocery stores.

In other cases, higher prices are getting passed all the way down to the consumer.

Lee's One-Hour Cleaner on Bissonnet has raised its prices from $1.10 a shirt to $1.25 to recoup most of the 15 percent increase in what it pays for dry-cleaning fluid, plastic hangers and the plastic-film bag placed over clean laundry.

Houston-based Pennzoil-Quaker State has raised the price of a quart of motor oil by 3 percent twice in the past year and plans another increase soon. The plastic resin used in its bottles costs the company 13 percent more than a year ago, but the oil inside costs twice as much.

Pennzoil had contracts for a lot of the oil it buys at the older, lower prices, however. And lower production costs elsewhere have helped offset its higher commodity costs.

The company expects to maintain its profit margins in the long run, says spokesman Greg Panagos.

At Houston's Ashley Inc., which sells floor coverings mostly to businesses but also to consumers, the costs of carpet, linoleum and vinyl have climbed because they are all made of petroleum, says owner Kevin Murphy. Even stone and ceramic tile floors cost more because of higher shipping costs.

Carpet that cost him $10 a yard a year ago now costs him $12.50 on average, Murphy says. The cost of a thick, expensive rug "like the kind the president of Shell Oil would want" has increased even more because it takes more petroleum to make plusher carpet.

Murphy notified his customers at the beginning of the year that prices were going up 25 percent.

Texas Vinyl Systems, a Houston company that makes and sells vinyl fences and decks, is getting ready to raise prices because it has seen the cost of long lengths of vinyl jump 5 percent in December and 7 percent this month.

General Manager Marty Morey expects things to get worse before they get better, because the plant is running out of old inventory bought at lower prices.

Even worse off, Morey says, are the companies that blend the vinyl resins and supply Texas Vinyl with molded lengths. They have watched their resin costs skyrocket 50 percent in the last year.

"What goes on in the petroleum industry definitely affects us," says Morey. "And in the end, it affects consumers, too."

Prices of Oil-Based Goods Start to Rise

-- Ain't Gonna Happen (Not Here, April 03, 2000


Fascinating article.

Our illustrious OZ treasurer assures us we live in non-inflationary times though. I don't see him making that much of a difference to prices stability. Toss in Goods & Services Tax starting mid-year and we've got ourselves a show Down Under - a rampant rampaging price hiking show. It's already begun actually but they haven't yet noticed at Parliament House.

-- Pieter (, April 03, 2000.

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