Surging oil prices are beginning to cut into the profits of a wide range of U.S. businesses, pushing many to raise prices and maneuver aggressively to offset the rising cost of merchandise made from petroleum.
Airlines, package shippers and car owners are no longer the only ones being squeezed by the price of oil, which shot up almost $11 a barrel on Friday alone to $138.54, a record.
Companies that make hard goods using raw materials derived from oil, like tires, toiletries, plastic packaging and computer screens, are watching their costs skyrocket, and they find themselves forced into unpleasant choices: Should they raise prices, shift to less costly procedures, cut workers, or all three?
Goodyear Tire and Rubber is trying to adapt. Its raw material of choice now is natural rubber rather than synthetic rubber, made from oil. To sustain profits, it is making more high-end tires for consumers willing to pay upwards of $100 to replace each tire on their cars.
Digital Access for only $0.99
For the most comprehensive local coverage, subscribe today.
These steps have not been enough, however, particularly now that the cost of natural rubber is also rising sharply, along with that of many other commodities. So Goodyear has raised the prices of its tires by 15 percent in just four months.
The sense that many companies may be hitting a wall is palpable. Corporate profits peaked last spring and have shrunk since then, Moody's Economy.com reports, drawing on Commerce Department data.
The housing crisis and the weakening economy are big reasons, but oil prices are adding greatly to the pressure on profits as retailers fail to pass along higher prices to consumers. That helps explain why expensive oil has not yet pushed up the inflation rate.
So far this year, the nation's employers have been cutting jobs at an accelerating pace, particularly last month, when the unemployment rate jumped to 5.5 percent from 5 percent. But with the vise on corporate profits tightening and the price of oil continuing to climb, more dire action, including job cuts and higher prices, may be in store, economists say, although there is still room to avoid such steps.
“Companies came into this period with extraordinarily high profit margins,” said Edward McKelvey, chief domestic economist at Goldman Sachs, “and some of the surge in raw material costs will be absorbed by lowering those profits.”
Still, the prevailing attitude that the economy could just keep absorbing higher oil prices is being tested – for the first time in nearly 30 years. Adjusted for inflation, a barrel of crude is now more expensive than it was in 1980, the previous peak.
“The conventional wisdom a couple of years ago was that oil did not have that much leverage over the economy,” said Daniel Yergin, chairman of Cambridge Energy Research Associates. “But now it plainly does. People are suddenly paying much more attention to their energy costs and trying to figure out how to manage them.”
Since last spring, the average profits of the nation's corporations – from behemoths like Goodyear to small neighborhood retailers – have declined at an annual rate of nearly 6 percent, government data show.
Even companies that have been performing well in the economic downturn are sounding notes of caution. Take Costco, the discount retail chain that offers a wide array of consumer goods, food, furniture, appliances and much more.
Costco's profit was up in the first quarter, but James Sinegal, the chief executive, says he is “starting to be confronted with unprecedented price increases” for the merchandise that Costco buys to stock its stores. His first response has been to buy in extra large quantities so that he has stock on hand to carry him through subsequent price increases.
“We just made a big purchase of Tumi luggage,” Sinegal said.
Procter & Gamble finds itself in a similar predicament. For its fiscal year beginning next month, it expects to spend an additional $2 billion on oil-based raw materials and commodities. That is double last year's increase, and it is carved from total revenue of just under $80 billion.
Price increases have helped to offset this cost. They have averaged nearly 5 percent for paper towels, bath tissues and diapers, all made with chemicals derived from oil, said Paul Fox, a company spokesman.