Fuel price escalation already spills into cost of other goods

www.miami.com on Fri, Jan. 31, 2003 By MELITA MARIE GARZA Chicago Tribune

CHICAGO - The oil price run-up, partly triggered by the threat of war with Iraq, has cut into milk money, and in some cases, the rest of the grocery bill too.

In January, Oberweis Dairy in North Aurora, Ill., increased its home delivery charge by 10 cents to $2.30 to cover increased diesel fuel costs. What's more, the 76-year-old dairy, which has 40,000 home delivery customers, is considering retrofitting trucks to run on gasoline to further cut fuel costs.

"We have been trying to ride out the price swings for the past three years, but this is completely out of control," said Robert Renaut, Oberweis' president. "We haven't passed any of the costs on. This increase just gets us back to even."

Diesel fuel, which sells for an average of $1.66 a gallon in the Chicago area, generally is more expensive than gasoline and supplies are more limited. As a result, Oberweis has looked into converting 54 home-delivery trucks and about a dozen larger vehicles used to haul milk to grocery stores to operate on gasoline.

"There is a time lag involved in ordering the required parts and having the trucks converted," Renaut said. "The other issue is that if supplies are disrupted, neither gasoline nor diesel might be available."

A prolonged war with Iraq likely would cause oil prices to soar further, contributing to a ripple effect of price increases as trucking companies and retailers try to pass off higher energy costs to consumers. The higher prices would be reflected in the bulk of the nation's goods, which primarily are delivered by truck.

The situation could be more serious than the one truckers and motorists confronted during the Persian Gulf War in 1991, when U.S. oil refiners were awash in crude inventory. Since 1999, oil companies have limited the amount of refined fuel kept in storage. As a result of an eight-week strike in Venezuela, one of the top five oil exporters to the United States, oil companies have been tapping stored inventories to keep products flowing.

Such use has reduced the U.S. inventory close to a critical 270-million barrel level that the federal government says could lead to supply disruptions.

The truckers only have to look back to 2000 to get an idea of what could happen. A price spike in diesel fuel essentially stalled truckers in parts of New England.

"Diesel fuel cost between $2.50 and $2.60 a gallon, and trucks would not even go into Maine because there was not enough freight to pick up on the return trip to offset the cost," said Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Association in Grain Valley, Mo.

Any disruption in trucking would have an almost immediate impact on consumers and workers.

Businesses ranging from groceries to manufacturers have widely adopted just-in-time inventory practices to reduce costly warehousing and to avoid having money tied up in parts or goods.

"There is more dependence on just-in-time deliveries," said Mark Whitenton, vice president for resources and environmental policy at the National Association of Manufacturers. "Even a couple of days disruption could cause factories to close."

Spencer paints a dire scenario for small or independent truckers, who generally operate under contract and, as a result, cannot impose surcharges to cover fuel price hikes.

"Most small-business truckers don't have an operating cash reserve that would allow them to withstand a long run of increased prices," Spencer said. "We would quickly see repossessions of trucks."

Consider what happened to long-haul trucker Lee Klass in 1990 when crude oil prices nearly doubled to $41 a barrel after Iraq invaded Kuwait.

"The price of diesel fuel jumped 40 cents a gallon," Klass, now 55, recounted. Rather than pay the price at the pump, he parked his truck. "I decided not to take any loads for a couple of days just to see how things shook out. It reaches a point that unless rates are doubled it doesn't make sense to haul any freight."

The quick success of the United States and its allies in the 1991 conflict eased fears of oil supply shortages, and prices plunged as rapidly as they had risen, easing to $21 a barrel by February 1991.

"The war could have a positive effect on the economy," said Sung Won Sohn, chief economist at Wells Fargo Bank. "We have a decisive war in our favor so the price of oil drops dramatically to low teens. That would raise consumer and business confidence significantly. The price of oil could drop by more than half, which would amount to a huge tax cut for us, bigger than anything Bush proposes."

Still, these days, uncertainty, rather than oil, seems more abundant.

"The world oil market is being strained right now and people are trying to guess what's going to happen when we invade Iraq," said Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University in Dallas.

"I believe the market already has counted in the effects of Iraq. But they aren't counting on Iraq, Venezuela, and the effects of any refinery, pipeline or other mishaps on top of that," Baxter said.

Baxter noted that two weeks ago a couple of oil platforms in the North Sea were shut down due to a flaring problem, taking more than 100,000 barrels a day off the market.

Customarily, an event like this would add a couple of cents to the price of a barrel of oil. But in the context of war, these incidents could ratchet up prices more significantly.

Other unknowns about potential supply disruptions loom, including the prospect of terrorist attacks on oil tankers, something that had not been widely contemplated in 1990.

"What will Saddam do with those oil wells and those oil fields?" Baxter asked. "Is this an opportunity for overt actions by terrorists? Disrupting the shipping lanes for these oil tankers would be a major disruption to the oil supply."

Bill O'Grady, vice president, futures research, at A.G. Edwards in St. Louis, asked: "Why were the oil companies holding such huge inventories prior to the Persian Gulf war? You saw a similar buildup prior to the Iran-Iraq war. And why aren't they building them now?"

"It could be that they don't think there is going to be a war. Or, yes, there will be a war, but it will be very short and they don't want to be saddled with a lot of product to sell at low prices. Or it could be that they are relying on the U.S. Strategic Petroleum Reserve, and counting on the government to hold the extra supply for them."

Last May Peapod Inc., the Skokie-based Web grocer, raised its delivery charge in the Chicago area from $2.95 for an order of $100 to more to $4.95, partly to offset rising fuel costs.

In December it went a step further. It spent $15,000 to install its own gasoline storage tanks at its Lake Zurich distribution center. Drivers for its fleet of 70 trucks cover a combined 6,000 miles daily and had been driving off their routes to find gasoline stations that would accept the company's credit cards.

Scott DeGraeve, vice president and general manager for Peapod's Chicago region, explained: "The rising fuel prices spurred us to see what we could do to offset these costs. It saves us a few pennies, but it also saves us labor and time."