The rising cost of fuel: How high it will climb, and how you can fight it (Web-exclusive expanded content)

An IMM reader survey shows that everyone is getting slammed by ascending energy costs. Here’s what’s happening and what you should do to conserve.

The global economy is driven by fuel. We need it to power our machinery, heat and cool our plants, and get our staff to work and our merchandise to end users. Given the current high prices of natural gas and oil (and their ripple effect on the rest of the energy industry), we must address the current cost of energy and the short-term outlook through 2006.

The indicator we hear most about is the price of crude oil, and this has been a real shocker in 2005. The Energy Information Administration (EIA) in the U.S. Dept. of Energy is usually fairly accurate in its predictions, but even its experts were unable to prognosticate the current surges.

In early June 2005, the EIA said it expected the price of domestic crude oil to average about $53/bbl in Q3 2005, and then top out at $55/bbl by the end of the year. For the consumer, that meant gasoline prices would be slightly more than $2/gal through the end of 2006 with diesel fuel continuing to run about a nickel more than regular unleaded in any given area.

However, those numbers were blown out of the water only weeks after their release. By the end of June we saw record-breaking prices with oil topping $60/bbl. In July the projections were revised to $57 to $59/bbl from Q3 2005 until the end of 2006. The Repton Group believes these forecasts to be optimistically low.

Some economists in the private sector, especially those at banks and investment houses, now predict that the price may go as high as $75/bbl by the end of 2005. Other analysts, such as the respected Bloomberg Financial News, doubt that oil will exceed $60 by much.

The translation for the consumer is that prices at the pump could reach an average of $2.72 for regular and $2.79 for diesel over the next 12 months.

What’s Driving the Rise in Energy Prices?

Despite international calls for oil conservation, worldwide demand for crude continues to rise. Demand increased by 3.2% in 2004 and is expected to increase by about 2.5% in 2005 and 2006.

Significantly, much of the international hunger for energy is coming from China and India—two major competitors for injection molders. According to the U.S. Dept. of Energy, Chinese demand growth, which averaged about 1 million bbl/day in 2004, is projected to be slower but still robust at an annual average of 600,000 bbl/day in 2005 and 2006. Although the pace of growth in demand has slowed, rising overall demand is driving up local prices, so Chinese and Indian molders will have to spend more profits on energy.

Aside from increasing demand, the biggest factor driving up fuel prices is speculation. Distilleries preparing home heating oil are running a little less than 2% behind where they were this time last year. Traders are betting a colder-than-normal winter could create a heating oil shortage and therefore drive up prices. There is also concern that the United States will not adequately expand refinery capacity to meet increased demand until the energy bill recently passed by Congress takes effect. Again, the supposition is that a shortfall in capacity will create a fuel shortage and drive up prices. This becomes a self-fulfilling prophecy.

Finally, no one can truly be sure how to predict what will happen in the Persian Gulf. Political instability in Iraq is certainly fodder for pessimists. Saudi Arabia is the only OPEC country with spare oil production capacity. Changes in leadership within the Saudi royal family could either deeply benefit or hurt the United States in its quest for reliable, increased supplies.

One bit of good news is that U.S. crude oil inventories are high, providing a bargaining chip and a cushion should anything unexpected occur in the Persian Gulf.

How Are Energy Prices Affecting Our Industry?

Rising energy costs have impacted nearly every aspect of injection molding, as our readers can attest. In our recent online poll, a whopping 67% of respondents said their energy costs have increased dramatically over the past year, while an additional 29% said their energy costs increased moderately.

The price of raw materials, the cost of running a plant, and transportation expenses have all increased dramatically. The increase in energy prices has affected our readers most in raw materials (67%). Nearly one-third of readers have seen their cost for polymer raw materials rise more than 30% in the past year while an additional 25% of those responding said their cost of raw materials rose 15% to 30%.

Andrew Liversis, chief executive of Dow Chemical, sees this as a bad sign. He recently said that higher oil and energy prices may make U.S. manufacturing permanently noncompetitive. “In the past two years, the chemical industry’s natural gas costs alone have increased by $10 billion.” This results in major lost sales.

Worse yet, fierce competition means that in our industry, the bulk of the expense cannot be passed on to the consumer, yet we are absorbing increased energy costs for other industries. Case in point is the use of Federal Express for shipping services. The company has been adding an automatic surcharge for shipments due to higher energy prices. Only 4% of our readers polled were able to recover more than 40% of the increases. The other 96% are feeling the pinch and seeing erosion of their bottom lines, with a greater than 10% loss in profits for 63% of the firms.

Ninety-two percent of firms have been forced to cut expenses due to high energy costs. Fifty-eight percent of those responding said it would make sense for them to invest in more energy-efficient machinery, but the catch-22 is that the number one area being cut to make ends meet is in the capital investment budget (55%). Most firms would prefer to postpone new purchases than cut staffing. Only 36% of companies are using staffing as a way to reduce their spending.

So far, high consumer confidence numbers have supported the economy, but keep a watchful eye on those numbers. Looking back to the oil crisis of the 1970s, we know that a panic among consumers could trigger another round of stagflation. On the flip side, as consumers spend a greater proportion of their income on gasoline, electricity, and heating oil, we could see a drop in the current home makeover craze and America’s love of big, gas-guzzling vehicles—two areas that have helped to support the plastics industry.

There is no end to energy woes in sight. In fact, John Engler, president of the National Assn. of Manufacturers, warns that the oil and energy cost crisis will “get much worse soon.” But there are steps you can take to mitigate the effects and help control your plant’s energy costs.

First, pay a visit to the U.S. Dept. of Energy’s website for industrial plants: www.eere.energy.gov/consumerinfo/industry/. The site lists inexpensive ways to reduce energy use.

In addition, consider these steps:

Perform scheduled maintenance on machinery. There is always the temptation to postpone scheduled maintenance when expenses are high and machines are running smoothly, but preventive measures such as proper lubrication can have a dramatic impact on fuel efficiency.

Evaluate your production schedule. Some power companies offer discounts to industrial users who run their equipment at night during the summer, rather than during the peak demand daytime hours. Summer nights are cooler on the staff and afford them the opportunity to be home with their children during summer vacations (thereby reducing daycare expenses). Or, consider having Fuel Free Fridays by running two 12-hour shifts per day, four days a week, with staff getting three-day weekends in lieu of overtime or a shift differential.

Price intermodal transportation. Combining the use of trucks and railroads, intermodal shippers may be more cost effective than over-the-road transportation when fuel costs are high.

Be energy savvy on all new capital investments. Everything in your building uses power. Compare fuel efficiency for every purchase, from the big machines down to the lights overhead; there are dramatic differences in fuel consumption from brand to brand or model to model. Before replacing anything in your shop, do a quick comparison. Paying a little extra up front for a more fuel-efficient model may reap big savings on your power bills for years to come.

Network with your local Chamber of Commerce. These are the folks who know your local community the best. They may be able to help you save money that can be redirected to pay rising energy costs. For example, some counties offer tax breaks to companies that organize car pools for workers. Find out what is available in your area and if it will work for you.