Pass-Along Pricing

The average price for gasoline is now .434 cents per gallon more than it was at the beginning of the year.

—The American Petroleum Institute

On March 16, John Schoen, MSNBC s senior producer, said that OPEC had lost control of its oil prices. He said the OPEC ministers, meeting in Iran, were facing a new problem, one they hadn t encountered in the alliance s 45-year history.

Schoen, saying world oil production may be at its limits, wrote, In the past, OPEC tried to cool overheated prices by pumping more [oil] when supplies got too tight. But most OPEC producers say they re already pumping as fast as they can. Some OPEC ministers, he said, believe they ve run out of options in controlling the price of crude.

On April 5, CNN quoted Federal Reserve Chairman Alan Greenspan: World energy markets are being strained, but market forces should eventually lead to higher oil inventories and help bring prices back down. He didn t list those market forces.

In the real world, on that same day, I paid $23.40 for 10 gallons of regular and, as the pump numbers whirled, remembered reading reports of sweet crude predicted to reach $100 per barrel. Sweet crude is the easiest to process into gasoline; it sold for $58.28 a barrel that day, and it dropped a few cents the day after.

Greenspan said vehicles on U.S. highways currently consume about 11% of total world-energy production. He also said that higher prices have slowed oil-demand growth, but only modestly.

Highway usage isn t the only problem, however, because other products, many used by signshops, also contain or require oil. Basic vinyl, PVC, for example, is made, mostly, from hydrocarbons and sodium chloride — oil and salt — 43% of the stuff is oil.

For that reason, if you re a vinyl processor, expect your vinyl-chloride suppliers — Formosa Plastics, Shintec, Occidental Chemical or Borden Chemicals — to ratchet up your prices.

Ditto on price increases if you re a supplier or own a signshop.

Consider this. The gasoline I purchased at $2.34 per gallon, less the .434 cent increase stated (above) by the American Petroleum Institute, indicates that, since January 1, Americans have suffered a 22% increase in gasoline prices. We can use this number to estimate the pricing increase that may arrive at your signshop s door, because vinyl, comprising roughly half its base from oil, should experience, then, half this 22% increase, or 11%. Knowing this, it s easy to foretell that your suppliers may implement a 10 to 15% price increase in vinyl and other oil-based materials, unless the oil price drops soon, or they choose to absorb the loss.

Typically, when new costs add to a manufacturer s operating expense, all parties — makers, distributors and suppliers — tend to elevate prices for all shelved items, meaning, for example, that vinyl manufactured with last October s cheaper oil may soon carry current prices.

Obviously, if you ordered supplies before the price increase, you won t suffer from the upscale pricing. In fact, you should have ordered oil-based materials as soon as you saw gasoline prices rise. In addition, try negotiating a guaranteed price with delayed delivery and payment.

If oil prices continue to rise — or hold steady at today s escalated rates — expect to see worldwide financial consequences, the first indicator being economic turndowns in the United States and the European Union countries, because these economies are richly based on oil. Simply put, higher oil prices cause higher product prices.

Further, higher fuel prices raise trucking and transportation costs, and this causes even more pass-along price increases. Higher fuel prices also reduce consumers expendable income — money now spent at restaurants, movies, Osco or Target.

This year, the worldwide demand for oil has increased by approximately two million barrels a day. China s growing demand significantly impacts this figure, but one can t help but wonder whether their oil goes into fuel or the plastic they use to form the tons of toys they sell to our children.

In an untitled report, the U.S. Dept. of Energy (DOE) Information Administration, in January, emphasized that the price of oil, as it applies to today s world economy, is critical. Oil is the largest internationally traded product, both in volume and value. Plus, the prices of energy-intensive goods and services are linked both to oil and other related energy prices. The report added that abrupt oil-price changes will have wide-ranging ramifications for both oil-producing and oil-consuming countries.

The report says, …most economic evidence points to the conclusion that a sudden, sharp oil price increase [or shock] has a negative impact on the economies of net oil-importing nations.

In his April 6 Financial Times story, business writer David Shellock quotes a JPMorgan bank (Chicago) analysist: Increased energy prices are likely to result in lower spending, not a wage-price spiral like the 1970s and is thus not an inflationary risk.

I m inclined to agree, but I don t like the reasons. I believe that the offshore-manufacturing move has put an invisible salary ceiling on first-world workers. Many companies have chosen offshore manufacturing as a cost-savings alternative. Problem is, I don t see prices lowering on the same scale as costs have decreased; in fact, many global corporations are recording record profits.

CNN s Lou Dobbs recently reported on a UC-Berkeley study that says as many as 14 million U.S.-based, white-collar jobs could be recreated in India, China and other countries. That s 11% of all U.S. employees. The possibilities include more than 2.8 million computer and math professionals that earn, here, an average annual salary of $60,350.

To cut costs, Océ s Dutch division (Venlo, Netherlands) has announced moving 30% of its manufacturing activities to Asia, although it hasn t yet named a country. Océ s press release says its manufacturing cost will significantly reduce, and company profitability will become less susceptible to exchange-rate fluctuations. The company will open an Océ Asian Technology Center in the region, to transfer knowledge and monitor its sourcing and manufacturing activities.

Further, Océ has signed with Singapore-based Flextronics, to handle a further 20% of print production. Flextronics specializes in manufacturing for third parties. Océ s action moves 50% of its present Netherlands production offshore. The Venlo plant presently employs 3,000 people.

China s average wage rate is 2.7% of that found in the United States, but its average productivity level is equally low. A United Nations Trade and Development report, dated 2002, indicates that China s Unit Labor Costs (a factor determined by incorporating production output with salary) rates 2.1 (units) against 100 in the United States. Comparatively, Japan scores 62.6 units and Mexico 16.3.

Some manufacturing analysts say other governments can compete with Asia s low wages by implementing stay-at-home tax incentives, and that businesses should invest in more high-tech systems.

The Federal Reserve Bank (St. Louis) Employment Cost Index chart (Fig. 1) displays a continuing decline in American wages and salaries since 2000. The Reserve s website (www.research.stlouisfed.org) displays another, more extensive, Compensation per Hour chart that shows a near-continuous wage decline since 1979. The Fed s pie charts (Fig. 2), Goods Export Shares and Goods Import Shares — 2004, illustrate part of the problem. Notice that, in all cases except China, the import and export of goods are somewhat equal. China s exports to the United States equal 13.35% of what we receive in total; we send back 4.30% of our exports. China also needs to appreciate its currency, to help curb the dollar s decline.