PsychoticDan
15-06-2006, 17:31
When people hear about high oil prices they tend to focus on driving. This story makes it clear how much we rely on oil for a lot more than transportation.
High cost of oil could put many jobs at risk (http://www.usatoday.com/money/economy/employment/2006-06-05-oil-cover-usat_x.htm)
By Barbara Hagenbaugh, USA TODAY
DARLINGTON, S.C. — Gazing out at the thousands of bales of fluffy, white polyester filling Wellman's factory, it's hard to imagine that the man-made fiber has the same origins as a gallon of gasoline.
But it does.
Of the 2.3 billion pounds of materials Wellman produces at its several factories around the world each year, 2 billion are derived from oil or natural gas. The company's polyester is used to make numerous products, including sports apparel, diapers and pillows.
The rising cost of oil has put a squeeze on the companies that use oil as an ingredient for their products. Although they are down from the records seen recently, oil prices are up more than 20% from a year ago and are more than 150% higher than they were five years ago. Natural gas prices have also risen.
Chemicals made from oil are used by companies to manufacture many products consumers rely on every day, such as plastic bottles, aspirin, lipstick and deodorant.
"It's used in pretty much everything," Wachovia economist Jason Schenker says. "I cannot look at my desk and see things that are not petroleum-based."
Even though oil-based products are so pervasive, the direct impact of the rise in the cost of making such goods on consumers has been — and likely will continue to be — minimal. That's because manufacturers, faced with strong global competition, are unable to pass along all of the added costs to customers. That means prices for most oil-derived products will likely barely budge as a result of higher energy costs.
But the impact on manufacturers and other companies that use oil-based ingredients could be significant, causing a ripple effect throughout the economy. As firms are faced with rising prices and see their margins cut, they may have to cut back on production, reduce pay increases or maybe even cut jobs or shut down.
"There's a squeeze going on," Wellman CEO Tom Duff says. High oil prices are "an issue that extends beyond just the gas pump. But that's all anybody really pays any attention to."
Says John Hodgson, chief marketing and sales officer at DuPont, "This is about jobs."
At some companies, job losses are already hitting.
Continental Tire announced last month that 481 employees will lose their jobs July 7 when it will drastically reduce production at its plant in Charlotte. The cutbacks are in part a response to higher raw material costs as well as declining demand for the company's tires in North America, Continental Tire says in a news release. The company has warned it may close the plant entirely. Tires are made with synthetic rubber produced with a chemical derived from oil.
Although pink slips have not been given out, Angela Keener, 44, and her husband, Doug, 47, expect they will be part of the July 7 layoffs because they work on lines at the factory that are set to be cut. They have both worked at the tire plant for 25 years. They met on the factory floor and have been married for 21 years. Her sister and brother-in-law also work at the tire plant.
"It's really upsetting to think that you have put that much time in, and then you have to start over," says Angela of High Shoals, N.C. "I could lose everything I have worked for 25 years."
The layoffs are not unexpected. Angela began taking accounting classes in the fall, and Doug has been taking welding courses. They have also been saving money.
Local governments across the country are warning they may have to let planned road projects lapse because prices for asphalt, an oil-based product, are skyrocketing. That means fewer hours for road workers.
Lynn Kading, president of Hills Materials, a highway contracting company in Rapid City, S.D., says his asphalt costs have doubled in the last year. He figures he has lost $3 million because governments, balking at the asphalt tab, have suspended projects that he has bid on recently.
"It's a big industry concern," Kading says. "It affects how much work we've got. Consequently, it affects how many hours our employees can get. And they have families to feed."
Wachovia's Schenker says the squeeze on companies could become more severe if oil prices exceed $70 a barrel for a considerable period.
Making matters worse, many companies are being hit with higher energy prices on a number of fronts. Not only are prices of oil-based goods increasing, but so are transportation costs and electricity prices.
But an extremely competitive market limits price increases. As the product gets processed further, the price increases typically get smaller because of strong competition at that level. By the time the product is in the hands of the average U.S. consumer, the gains are barely noticeable.
"The further out you get from the initial increases, the less you see them," says Stephen Brown, director of energy economics at the Federal Reserve Bank of Dallas.
Don Norman, economist at industry group Manufacturers Alliance/MAPI, says U.S. companies are at a distinct disadvantage compared with companies in other parts of the world.
"While the price of oil may be the same in the U.S. and China, the other cost of production, namely labor ... gives foreign competitors that much more of an advantage," he says.
Looking for savings
At Wellman, oil and natural gas account for approximately three-quarters of the company's total costs — including payroll and health care, typically the biggest costs for companies. In addition to making polyester, Wellman manufactures a BB-sized material made from energy-derived chemicals used to produce plastic containers made to hold everything from water to shampoo to peanut butter.
"We like to say we control costs well, and we cut costs and we do all the things that we are supposed to do, but when you have that big a piece of it that gets controlled by the price of oil and natural gas, it's much more difficult to be able to keep your costs under control," CEO Duff says. So the company tries to save on energy-related costs anywhere it can.
At its 760-acre factory in Darlington, just a few minutes from the famous NASCAR racetrack, Wellman has installed new software to maximize the efficiency of the company's boilers. The software has reduced energy use in that area by 5%, says plant manager Ian Shaw.
The factory, which operates 24 hours a day, 365 days a year, also cuts some production during peak hours in the summer, when the local utility charges more to encourage conservation during what is typically a two-hour window in late afternoon. And throughout the million-square-foot plant, workers save every scrap — including small, wayward strands of polyester — to be recycled.
Recycling is a way the company has tried to reduce the impact of higher energy costs.
The company is stepping up its use of recycled plastic bottles to make fiber products rather than manufacturing the products using chemicals. Using recycled materials is typically far more expensive than manufacturing with the energy-derived chemicals. But that is no longer a given.
Wellman is also promoting its product that is made from recycled carpeting fibers.
For decades, auto companies have been using the chemicals for "under the hood" applications, Duff says. Wellman in recent years has been working to make the process of separating out the fibers more efficient.
The company has also raised prices several times in recent months. But the increases do not come close to offsetting the gain in the company's energy costs, Duff says.
"The margins have been tightening because you just haven't been able to pass everything through," he says.
Coping with higher costs
Companies — big and small — that depend on oil as a key ingredient are trying to cope with the higher costs:
• Wilmington, Del.-based DuPont announced May 17 its intent to raise prices for a variety of its products. The company previously increased prices 5% in the fourth quarter and 3% in the first quarter.
But the increases won't completely cover the higher costs. Raw material costs have risen 85% in four years and hit a record in the first quarter, the company says.
"The cost increases have been so significant, so rapid and so sustained, you have a triple whammy," DuPont's Hodgson says. "There comes a point where you say, 'I just can't absorb it anymore.' "
• Profit margins at Erie Molded Plastics in Erie, Pa., have been reduced. Phil Tredway, president of the firm that makes plastic caps for soda and water bottles, says the price of oil-based plastic resin is up as much as 70% from a year ago. He says his suppliers are announcing price changes weekly, making it hard to draw up contracts with his clients.
Tredway says he can pass some of those added costs along to his customers, but not all.
"It makes a difficult business even more difficult," he says.
• Paraffin wax, an oil-based product, is one of the key ingredients in Crayola crayons. Paraffin costs have risen 60% since 2004 and are up 80% from five years ago, Crayola spokesman Eric Zebley says.
But the company has not raised prices. Crayola is taking a number of steps to make its factory in Easton, Pa., more efficient, including reusing more scrap materials.
"We are doing everything we can to keep our crayons affordable and not raise prices," Zebley says.
• Akron, Ohio-based Goodyear Tire and Rubber has raised tire prices five times, 5% to 6% each time, since the start of 2005 in response to the higher raw materials prices.
Approximately two-thirds of Goodyear's raw material costs are related to oil, spokeswoman Tricia Ingraham says. The company's raw materials prices nearly doubled from 2004 to 2005 to $5.6 billion. Raw materials now account for more than two-thirds of Goodyear's total costs.
In addition to raising prices, the company is focusing on higher-end tires, which bring in more money. "Our main focus has been on the higher-margin, higher-technology tire," Ingraham says.
Wellman's Duff warns that high energy costs will likely pose a challenge to companies for many years. And although consumers might not be paying now for the increased costs, they may end up paying for it later, in the form of lost jobs when companies start losing money and are forced to shut down, he says.
"The consumer doesn't want to pay more for the end product," Duff says. "But at the end of the day, (the high cost of energy) gets pushed back to that consumer, whether they recognize it or not."
High cost of oil could put many jobs at risk (http://www.usatoday.com/money/economy/employment/2006-06-05-oil-cover-usat_x.htm)
By Barbara Hagenbaugh, USA TODAY
DARLINGTON, S.C. — Gazing out at the thousands of bales of fluffy, white polyester filling Wellman's factory, it's hard to imagine that the man-made fiber has the same origins as a gallon of gasoline.
But it does.
Of the 2.3 billion pounds of materials Wellman produces at its several factories around the world each year, 2 billion are derived from oil or natural gas. The company's polyester is used to make numerous products, including sports apparel, diapers and pillows.
The rising cost of oil has put a squeeze on the companies that use oil as an ingredient for their products. Although they are down from the records seen recently, oil prices are up more than 20% from a year ago and are more than 150% higher than they were five years ago. Natural gas prices have also risen.
Chemicals made from oil are used by companies to manufacture many products consumers rely on every day, such as plastic bottles, aspirin, lipstick and deodorant.
"It's used in pretty much everything," Wachovia economist Jason Schenker says. "I cannot look at my desk and see things that are not petroleum-based."
Even though oil-based products are so pervasive, the direct impact of the rise in the cost of making such goods on consumers has been — and likely will continue to be — minimal. That's because manufacturers, faced with strong global competition, are unable to pass along all of the added costs to customers. That means prices for most oil-derived products will likely barely budge as a result of higher energy costs.
But the impact on manufacturers and other companies that use oil-based ingredients could be significant, causing a ripple effect throughout the economy. As firms are faced with rising prices and see their margins cut, they may have to cut back on production, reduce pay increases or maybe even cut jobs or shut down.
"There's a squeeze going on," Wellman CEO Tom Duff says. High oil prices are "an issue that extends beyond just the gas pump. But that's all anybody really pays any attention to."
Says John Hodgson, chief marketing and sales officer at DuPont, "This is about jobs."
At some companies, job losses are already hitting.
Continental Tire announced last month that 481 employees will lose their jobs July 7 when it will drastically reduce production at its plant in Charlotte. The cutbacks are in part a response to higher raw material costs as well as declining demand for the company's tires in North America, Continental Tire says in a news release. The company has warned it may close the plant entirely. Tires are made with synthetic rubber produced with a chemical derived from oil.
Although pink slips have not been given out, Angela Keener, 44, and her husband, Doug, 47, expect they will be part of the July 7 layoffs because they work on lines at the factory that are set to be cut. They have both worked at the tire plant for 25 years. They met on the factory floor and have been married for 21 years. Her sister and brother-in-law also work at the tire plant.
"It's really upsetting to think that you have put that much time in, and then you have to start over," says Angela of High Shoals, N.C. "I could lose everything I have worked for 25 years."
The layoffs are not unexpected. Angela began taking accounting classes in the fall, and Doug has been taking welding courses. They have also been saving money.
Local governments across the country are warning they may have to let planned road projects lapse because prices for asphalt, an oil-based product, are skyrocketing. That means fewer hours for road workers.
Lynn Kading, president of Hills Materials, a highway contracting company in Rapid City, S.D., says his asphalt costs have doubled in the last year. He figures he has lost $3 million because governments, balking at the asphalt tab, have suspended projects that he has bid on recently.
"It's a big industry concern," Kading says. "It affects how much work we've got. Consequently, it affects how many hours our employees can get. And they have families to feed."
Wachovia's Schenker says the squeeze on companies could become more severe if oil prices exceed $70 a barrel for a considerable period.
Making matters worse, many companies are being hit with higher energy prices on a number of fronts. Not only are prices of oil-based goods increasing, but so are transportation costs and electricity prices.
But an extremely competitive market limits price increases. As the product gets processed further, the price increases typically get smaller because of strong competition at that level. By the time the product is in the hands of the average U.S. consumer, the gains are barely noticeable.
"The further out you get from the initial increases, the less you see them," says Stephen Brown, director of energy economics at the Federal Reserve Bank of Dallas.
Don Norman, economist at industry group Manufacturers Alliance/MAPI, says U.S. companies are at a distinct disadvantage compared with companies in other parts of the world.
"While the price of oil may be the same in the U.S. and China, the other cost of production, namely labor ... gives foreign competitors that much more of an advantage," he says.
Looking for savings
At Wellman, oil and natural gas account for approximately three-quarters of the company's total costs — including payroll and health care, typically the biggest costs for companies. In addition to making polyester, Wellman manufactures a BB-sized material made from energy-derived chemicals used to produce plastic containers made to hold everything from water to shampoo to peanut butter.
"We like to say we control costs well, and we cut costs and we do all the things that we are supposed to do, but when you have that big a piece of it that gets controlled by the price of oil and natural gas, it's much more difficult to be able to keep your costs under control," CEO Duff says. So the company tries to save on energy-related costs anywhere it can.
At its 760-acre factory in Darlington, just a few minutes from the famous NASCAR racetrack, Wellman has installed new software to maximize the efficiency of the company's boilers. The software has reduced energy use in that area by 5%, says plant manager Ian Shaw.
The factory, which operates 24 hours a day, 365 days a year, also cuts some production during peak hours in the summer, when the local utility charges more to encourage conservation during what is typically a two-hour window in late afternoon. And throughout the million-square-foot plant, workers save every scrap — including small, wayward strands of polyester — to be recycled.
Recycling is a way the company has tried to reduce the impact of higher energy costs.
The company is stepping up its use of recycled plastic bottles to make fiber products rather than manufacturing the products using chemicals. Using recycled materials is typically far more expensive than manufacturing with the energy-derived chemicals. But that is no longer a given.
Wellman is also promoting its product that is made from recycled carpeting fibers.
For decades, auto companies have been using the chemicals for "under the hood" applications, Duff says. Wellman in recent years has been working to make the process of separating out the fibers more efficient.
The company has also raised prices several times in recent months. But the increases do not come close to offsetting the gain in the company's energy costs, Duff says.
"The margins have been tightening because you just haven't been able to pass everything through," he says.
Coping with higher costs
Companies — big and small — that depend on oil as a key ingredient are trying to cope with the higher costs:
• Wilmington, Del.-based DuPont announced May 17 its intent to raise prices for a variety of its products. The company previously increased prices 5% in the fourth quarter and 3% in the first quarter.
But the increases won't completely cover the higher costs. Raw material costs have risen 85% in four years and hit a record in the first quarter, the company says.
"The cost increases have been so significant, so rapid and so sustained, you have a triple whammy," DuPont's Hodgson says. "There comes a point where you say, 'I just can't absorb it anymore.' "
• Profit margins at Erie Molded Plastics in Erie, Pa., have been reduced. Phil Tredway, president of the firm that makes plastic caps for soda and water bottles, says the price of oil-based plastic resin is up as much as 70% from a year ago. He says his suppliers are announcing price changes weekly, making it hard to draw up contracts with his clients.
Tredway says he can pass some of those added costs along to his customers, but not all.
"It makes a difficult business even more difficult," he says.
• Paraffin wax, an oil-based product, is one of the key ingredients in Crayola crayons. Paraffin costs have risen 60% since 2004 and are up 80% from five years ago, Crayola spokesman Eric Zebley says.
But the company has not raised prices. Crayola is taking a number of steps to make its factory in Easton, Pa., more efficient, including reusing more scrap materials.
"We are doing everything we can to keep our crayons affordable and not raise prices," Zebley says.
• Akron, Ohio-based Goodyear Tire and Rubber has raised tire prices five times, 5% to 6% each time, since the start of 2005 in response to the higher raw materials prices.
Approximately two-thirds of Goodyear's raw material costs are related to oil, spokeswoman Tricia Ingraham says. The company's raw materials prices nearly doubled from 2004 to 2005 to $5.6 billion. Raw materials now account for more than two-thirds of Goodyear's total costs.
In addition to raising prices, the company is focusing on higher-end tires, which bring in more money. "Our main focus has been on the higher-margin, higher-technology tire," Ingraham says.
Wellman's Duff warns that high energy costs will likely pose a challenge to companies for many years. And although consumers might not be paying now for the increased costs, they may end up paying for it later, in the form of lost jobs when companies start losing money and are forced to shut down, he says.
"The consumer doesn't want to pay more for the end product," Duff says. "But at the end of the day, (the high cost of energy) gets pushed back to that consumer, whether they recognize it or not."