How Factories are Offsetting Higher Energy Prices

June 9, 2004

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While consumers are feeling the blow of oil price hikes, many manufacturers are surprisingly taking things in stride. Find out how they're keeping the prices of their goods largely unchanged:

With crude oil prices topping $40 a barrel, prices of manufactured goods should also be surging, right? Wrong. Industrial companies are managing to counteract oil hikes with energy efficiency measures that in many cases have been in place for a decade or more and are now being implemented with renewed vigor. And industrial firms are not only doing this to offset skyrocketing oil prices but also to lessen the impact of increasingly expensive natural gas, which has tripled in price over the last three years. As a result, the prices of hundreds of manufactured goods have stayed steady or risen only slightly so far, even as oil prices hit the roof.

"Energy is still a big, controllable cost," Neal Elliott, who manages the industrial program for the American Council for an Energy Efficient Economy, tells The New York Times. "We have wrung out most of the savings from labor, but energy is something that can still be cut back." While conservation does have its limits—according to economists, prices will slowly increase if oil averages $35 a barrel or more, or about $10 above the usual price range, and natural gas prices stay at a comparable level—this focus on energy efficiency has worked so far.

For now, consumers are feeling most of the pain of skyrocketing fuel costs because gasoline generally accounts for a greater portion of their budgets. In fact, consumers will bear about two-thirds of the growing oil tab, says William C. Dudley, chief United States economist at Goldman Sachs. In contrast, manufacturers are not as hard hit partly because energy is a relatively small percentage of their costs. And unlike in previous oil crises, this time more companies can pass along price hikes, as robust demand in a rebounding economy is allowing them to make higher prices stick. In addition, business-to-business sales of products and services are heating up even as sales to consumers slow down.

Energy conservation is proving to be a potent way for manufacturers to offset soaring energy costs. For example, Goodyear, which has nine factories in the U.S., has switched to a fuel that is derived from waste fuel oils, says Stuart Rickman, the company's technology team leader in energy management. Moreover, Goodyear reuses spent steam as it turns back into water. This still-piping-hot water is used to heat rooms, for instance. Additionally, the company has installed a solar wall in a factory in an effort to ease its reliance on heat generated by oil and natural gas furnaces. It is currently testing this alternative power source for possible use in winter heating.

To conserve energy, industrial companies are also increasingly turning to cogeneration—also called combined heat and power (CHP)—the simultaneous production of electricity and useful heat from the same fuel or energy source. With cogeneration systems, facilities not only generate their own electricity but also utilize excess heat for process steam, hot water heating, space heating and other thermal needs. They can also use this waste heat to produce steam for electricity production.

For 3M, maker of Scotch tape, industrial tape and bandages, cogeneration represents just one way the company is counteracting escalating energy prices. "There are literally a thousand or more conservation projects around the company," Steven Schultz, 3M's energy program manager, tells The New York Times. For example, the company has refrained from using a petroleum-containing solvent for the adhesive on its tapes and is now mostly employing a water-based alternative that is both cheaper and more eco-friendly, notes John R. Cornwell, a company spokesman. As a result of the company's energy conservation efforts, it has saved $21 million and has been able to keep prices of numerous products largely unchanged from a year ago. "I can't say prices won't go up, but they haven't yet," says Cornwell.

But there are industries that will be burned by surging oil prices, no matter how much they embrace energy efficiency. For example, automobiles, airlines and full-load truckers will likely find their profits pinched by rising energy costs. Airlines, many of which are now attempting to reduce their load by cutting back on onboard items such as magazines and seat-back phones, are expected to take a hit if oil prices settle above $35 a barrel for the year. "If it averages $32, the industry will break even, and if it averages $36 or more, we will definitely show a loss," says Giovanni Bisignani, director general of the Montreal-based International Air Transport Association, which counts most airlines as members.

Fortunately, many more industries are expected to weather the current oil shock with little damage. With energy conservation as a strategy and a rebounding economy on their side, most industrial firms will likely emerge from this oil crisis unscathed.

Sources:

Controlling Energy Costs on the Factory Floor
Louis Uchitelle
The New York Times, May 27, 2004
www.nytimes.com/2004/05/27/business/27conserve.html

Limiting the Damage from Sharply Higher World Oil Prices
Claudia H. Deutsch
The New York Times, May 24, 2004
www.nytimes.com/2004/05/24/business/24oil.html

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