We really do live in an "oil economy". Oil is involved in almost everying we purchase, from plastics to transportation.
Which is why I have been mystified by inflation this year. How can oil triple in price without raising the prices of everything else? Even gasoline has risen in price less than oil itself. What gives?
As Energy Costs Soar, Companies Retool Operations
Many Avoid Price Increases By Improving Efficiency; Oil Surges Past $75 a Barrel
April 22, 2006
Soaring energy prices have yet to take a big bite out of economic growth, but already, the high cost of energy is changing corporate behavior.
In industries from airlines to glassmaking, companies are curbing usage, revamping machinery and shifting production schedules to offset energy costs. Family-run brick maker Pinehall Brick Co., for example, has started putting slightly larger holes in its bricks because lighter bricks take less power to produce.
With the price of crude oil topping $70 a barrel, concern is growing about when and if pricier energy will damp the economy. On Friday, the near contract for oil on the New York Mercantile Exchange gained $1.48, or 2.01%, to $75.17 a barrel, the fourth consecutive record close this week. That's still short of the inflation-adjusted record of $97.55, reached in April 1980, but the rise comes as prices of other commodities are surging and broader inflationary pressures appear to be growing.
For consumers, the costs so far have been felt mainly at the pump, where prices for unleaded regular gasoline are up more than 27% since the beginning of March to $2.85.
But most indications are that companies still aren't passing on the bulk of higher oil prices to consumers. "Some sectors, such as trucking, are passing higher energy costs on to customers, but most sectors just have to increase their efficiencies to cover those costs," says Stephen Brown, director of energy economics at the Dallas Federal Reserve.
The question is when companies might start raising prices. Just four years ago, oil prices were expected to remain at about $23 a barrel over the long term.
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Some economists say the gradual nature of the climb helps explain why the global economy hasn't been derailed as one price threshold after another has been surpassed. That also may explain how companies continue to rack up strong profits in the face of these costly headwinds. "Companies have simply become very good at adjusting to higher oil prices," says Mr. Brown.
