Oil Prices Seep Over Economy: We Energies Asks to Boost Rates As Crude Touches $111

By Thomas Content, Milwaukee Journal Sentinel

Mar. 14–The price of crude oil surged to a trading record of $111 a barrel Thursday, continuing a run-up that has led to record gasoline prices and high home heating costs while sending expensive ripples through the economy.

The latest example: We Energies of Milwaukee asked state regulators to approve an increase of $79 million in electricity rates. That would be an increase of $2.24 a month, or 2.6%, in the average residential consumer’s bill.

A key reason for the request is the record price of diesel fuel used by trains carrying coal from Wyoming’s Powder River Basin to the utility’s coal-fired power plants.

Some energy analysts expect the pain to continue. The federal Energy Information Administration said the price of a gallon of gasoline will hit $4 in some regions this year, and it projects the price of a barrel of oil will average $94 in 2008.

“We will look back at $3 gas as cheap,” said Randy Udall, who has studied oil trends and global warming as director emeritus of the Community Office for Resource Efficiency in Aspen, Colo.

After touching $111 a barrel Thursday, crude closed at $110.33. It has risen by $50 a barrel over the past year.

The increase is linked to tight global petroleum supplies at a time of strong demand, according to the Energy Information Administration, which predicts that oil prices will finish this year 30% higher than in 2007.

Businesses say it’s tough to pass along higher energy costs by raising prices, given the housing slump, the credit crisis and worries about a recession.

In Wisconsin, oil is used in making everything from plastics and chemicals to fertilizer and paper.

While some energy costs are shared in common — heating buildings or gassing up delivery vans — each business owner has a story to tell about how those costs are showing up at the factory, store or job site.

Bakery

Kevin Schuk, vice president of the Whitefish Bay-based Breadsmith Franchising chain, spends the majority of his time these days worrying about the price of flour, not gasoline.

It’s not that high fuel costs haven’t been a concern for his bakery. It’s just that the price of flour, which is made from wheat, is an even bigger worry. And fuel is part of that problem, too.

Wheat price increases have been driven partly by rising worldwide demand, as residents of developing countries become more affluent. Bad weather in Australia and the weak dollar also play a role. But U.S. government subsidies of corn, which is used to make ethanol gas, have prompted many farmers to shift their fields from wheat to corn, reducing supply and driving up prices.

“We’ve had four price increases in the past six months,” Schuk said. Five years ago, a 50-pound bag of flour sold for $6 to $8, he said. Now the price is in the mid-$30 range.

At Breadsmith, that has translated into a price of $3.75 for an average loaf, from $3.25 a year ago.

– Doris Hajewski

Plastics manufacturer

Skyrocketing oil prices have put Bob Porsche and his $8 million-a-year plastics business in a vise-like squeeze.

Costs of petroleum-based raw materials, which can account for nearly half of his production costs, rose 10% last year. “Those figures,” he said, “will probably double.”

At the same time, the medical suppliers that buy his plastic parts will drop him and find cheaper suppliers if General Plastics Inc. in Glendale tries to pass along the higher costs.

Prices for resins — the synthetic raw materials from plastics refineries — are at record highs, said Howard Rappaport of Chemical Market Associates Inc., a global petrochemicals and plastics consulting firm in Houston. “They are raw materials for everything from trash bags to televisions.”

As its margins shrink, General Plastics last year trimmed staff, spent a half-million dollars on ultra-efficient new machinery, hired three full-time efficiency consultants, installed automation software wherever it could and at one time got workers to accept a 32-hour workweek.

“We need to scrutinize any and every part of the company,” Porsche said. “Those that aren’t doing that aren’t going to be around in five years.”

– John Schmid

Florist

Turning down the heat isn’t an option for a company that grows several million plants a year in dozens of greenhouses.

Instead, Milaeger’s Inc. home and garden center in Racine tinkers with the timing of crops and opens greenhouses as late as possible to cut down on energy costs.

“If you can close down a greenhouse for a week, that can be quite a savings,” co-owner Kevin Milaeger said.

Heating can account for as much as 40% of the production costs for a plant nursery, in part because greenhouses are difficult to insulate, said John Esser, executive secretary of the Wisconsin Commercial Flower Growers Association in Madison.

Milaeger’s greenhouses use an automated heat retention curtain to keep them warm as long as possible.

Although oil, propane and natural gas are still the primary fuel sources for greenhouses, growers are beginning to look seriously at alternative fuels — among them, corn oil and wood chips — as energy costs climb.

Smaller cost increases associated with energy prices include plastic containers, fertilizers and pesticides.

“In a year like this, how much of that can we pass on?” Esser said. “We’re selling a product that people don’t have to buy.”

– Marino Eccher

Dairy farmer

Rising energy costs have taken a slice of farmers’ profits, even as farmers benefit from higher milk and grain prices.

“The money is coming in one door and going out the other,” said Patrick O’Brien, a dairy farmer in Dane County. He and his brother, Tom, milk 230 cows on their 110-year-old family farm.

In January, the farm’s electric bill was $1,981.20, up 50% from a year earlier. And the cost of diesel fuel jumped 30% — significant, given the farm uses 10,000 gallons a year.

Energy costs permeate just about every farm expense, from raising livestock to harvesting crops.

Fertilizer prices are at all-time highs, partly because it takes a lot of natural gas to make the products farmers use. The cost of herbicides, pesticides and other raw materials also has soared because of energy costs.

– Rick Barrett

Commercial printer

Computers and cars are driving down energy costs at A/E Graphics Inc.

The 32-year-old printing company, with 25 employees in Brookfield, Milwaukee and Mequon, is confronting fuel costs on two fronts: paper and transportation.

“One of the biggest areas where energy costs have affected us has been paper,” said Tom Taubenheim, the company’s president. “We print a lot of it.”

About 82 million tons a year. And as the cost of oil has escalated, so has the cost of manufacturing and delivering paper.

So A/E Graphics has been pushing paperless practices. A year and a half ago, it set up a Web site through which customers can send their orders electronically without clogging up e-mail systems.

Taubenheim figures the Web site has eliminated 90% of the pickups the company has had to make from customers.

Still, A/E Graphics’ fleet rolled up 211,000 miles last year. The 10 four-cylinder vehicles average 28 miles per gallon. Taubenheim plans to replace them all by 2012 with more fuel-efficient vehicles using hydrogen fuel cells or hybrid technologies.

“Every penny counts,” he said.

– Joel Dresang

Roofing contractor

Rob McNamara’s tasks now include trying to gauge future oil prices.

F.J.A. Christiansen Roofing Co. sometimes must bid on projects four to five months in advance, and those bids are tied partly to the price of asphalt — made from the remains of a barrel of crude after it has been refined into fuel.

“You obviously have to keep your ear to the ground to know what could be coming down the track,” said McNamara, president of the 129-year-old company.

Roofing companies buy asphalt in bulk for flat roofs in commercial projects. Asphalt also is a core component in shingles, roofing felts and other products.

In all, the price of asphalt roofing products has increased 40% to 50% in the past five years, McNamara estimates.

Also, the price of diesel fuel has increased to the point that some refiners are processing asphalt into diesel.

“That’s tightened up the supply,” said Greg Johnson, operations manager for F.J.A. Christiansen Roofing.

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