DETROIT -- This is starting to hurt. (Oil prices)

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Fast oil price rise hits hard Businesses consider alternatives to cope with higher costs

James Borchuck / The Detroit News Craig Parker of Hubert Distributors Inc. fills up with diesel, which has climbed in price along with gas.

By Joel Smith and Peronet Despeignes / The Detroit News

DETROIT -- This is starting to hurt. The nation is roughly half as oil-dependent as it was 20 years ago, and gas remains cheap by historical standards after adjusting for inflation, so when oil prices rebounded last year from historic lows, the impact was expected to be muted.

But with crude oil prices triple and gasoline prices 50 percent above year-ago levels, a number of Michigan businesses are smarting. "Fuel prices aren't that high -- it's how fast the price went up," said Tim McCarthy, owner of Commuter Transportation in Romulus. "You don't have time to adjust. It's a big impact in a hurry." "The rise in gas and diesel prices is killing us," said Darryl Morris, who co-owns Morris Construction in Ypsilanti.

Multiply stories like that by several million, and you get what some consider a disturbing pickup in the rise of the nation's overall price level -- aka inflation. Last week, government reports showed wholesale prices in February rose at the fastest clip in 10 years and retail prices at the fastest 12-month pace in more than three years." Heavy energy users will likely get relief, but not soon. The world's major oil producers are widely expected to boost output and push prices down when they meet next week. Gas prices in some areas have dipped over the past few days, and the financial futures market -- where speculators bet on where commodity prices are headed -- predicts gas prices will fall 27 percent to $1.10 a gallon by December.

But there's uncertainty over what oil producers will do, and experts say even quick action may not keep unleaded gas from hitting $2 a gallon this summer. Premium is already $2.15 in San Francisco. "One to 1.5 million more gallons of oil a day from the world's oil producers may not be enough to satisfy summer demand," said Phil Flynn, an energy analyst for Alaron Trading Corp. in Chicago. "Even if we get the oil, we'll need refineries running at 98 percent to process it all, and there's the possibility of panic buying."

Reduced profit margins Oil price update

HOME OIL RESERVES: President Clinton on Saturday asked Congress to create an emergency heating oil reserve in the Northeast to blunt future shortages. His proposal would not directly alleviate high oil prices and low supplies.

DIPLOMACY CONTINUES: Energy Secretary Bill Richardson begins a new round of energy diplomacy today, when he travels to Nigeria, Indonesia and Algeria to urge them to increase oil production, the White House said Saturday. Meanwhile, OPEC is scheduled to meet March 27 to decide whether to increase production to help close a 2 million barrel-per-day shortfall in world oil supplies.

Managers of energy-intensive businesses across the region are running low on profit margins and scrambling to adjust. Morris estimates his accumulated fuel costs are already running $1,000 above year-ago levels. He lays foundations for homes, garages and loading docks and relies on six heavy vehicles. Morris says the oil-output cuts agreed to by major producers last year "are like telling people you have to pay for air now to breathe." Deliverers are in a bind. "We've felt the impact... (and) we're worried it could go up even more," said Alice J. Gustafson, owner of Hubert Distributors Inc., a beer distributor in Pontiac. Her company, which uses 40 trucks and 25 cars, has switched to more fuel-efficient diesel vehicles. "That has helped us, but diesel prices have gone up, too. We're looking for other ways to cut costs, but our hands are tied," she said. "The suppliers control the pricing."

Juanita Winebarger, 61, a retired resident of Temperance, doesn't make long commutes anymore, but says she may change her driving habits if prices move higher. "I don't drive long distances so it hasn't bothered me much," she said. "But when prices get to around $1.80 or so, I'll watch how much I drive."

Increasing rates Several firms said they may be forced to raise prices. "Our rates are going up April 1," said Kim Ladanyi, office manager of All Around Moving in Taylor. Her prices will rise $7, to $74 per hour, for a two-person truck. "If it was just a short period, then maybe we could hold out. "It is frustrating. We have no control. United Parcel Service, one of the nation's largest shippers, has an itchy trigger finger. "This has an impact," said Dan McMackin, a UPS spokesman in Atlanta. "While we haven't put in a fuel surcharge, it is a possibility." Several airlines may lose money this year, raise ticket prices or both. Northwest expects to spend $600 million more on fuel -- and profits were $300 million last year. General Motors Corp., DaimlerChrysler AG and Ford Motor Co. last week raised shipping costs on new car deliveries 3 percent to 5 percent. Rising energy prices have fueled an inflation rebound. In a neutral credit environment, a big price jump would siphon cash from other markets, leading to declines in other prices, Comerica chief economist David Littmann said. But the pickup in inflation suggests the Federal Reserve may be supplying the economy too much credit despite several interest-rate hikes over the past year. Mike Rogers of Michigan's Small Business Administration says the rise is not on the radar screens of most members -- consultants, accountants and home-office business people, among them. "But if they rise to $2, that'll squeeze more businesses, and make them cry uncle," he said.

An oil balancing act Why are oil producers dragging their feet? William Stephens, vice-president of CMS Energy's Oil and Gas operations in Houston, provides one answer. "Over the course of the Asian crisis through 1998, oil prices collapsed, which is very, very destabilizing in these (oil-exporting) countries," he said. "They start to run budget deficits and have trouble paying civil servants.

"There's a lot of concern among oil producers about prices falling back to depressed levels." Flynn says the United States has three options: wait out the price hike, cut gas taxes (which total 43.9 cents in Michigan, 11th highest in the nation) or unleash oil from the nation's emergency reserves. The third option wouldn't affect prices quickly and could anger oil producers such as Iran, just when the United States is trying to improve relations.

Consumers should put the rise in perspective, Flynn said. Oil prices fell from $25 to as low as $10 a barrel -- gas prices to 85 cents in some parts of the country -- through the depths of the 1997-98 global economic crisis.

"We're a bit spoiled. No one gave much thought to what OPEC (the Organization of Petroleum Exporting Countries) was going through," Flynn said. "Besides, what else can you get for less than 2 bucks a gallon?"

http://www.detnews.com/2000/business/0003/19/A01-19044.htm



-- Martin Thompson (mthom1927@aol.com), March 20, 2000


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