Energy Costs Drive Up Prices of Nearly Everything
STEVE INSKEEP, host:
The extra money you're spending at the pump is extremely transparent - you stand there and watch it happen. What is less apparent is the extra money you're spending on petroleum everywhere else. Higher prices for oil and gas are buried in the cost of just about everything we use.
NPR's Christopher Joyce explains how we're paying more even after we drive away from the gas station.
CHRISTOPHER JOYCE: An oil refinery or a petrochemical plant is kind of a like an old-fashioned ice cream parlor. You start with a pretty basic feed stock - oil or natural gas - but with a little work you can turn out a whole bunch of flavors. Gasoline or diesel fuel are two flavors, but there are others that might sound unfamiliar - ethylene and propylene and xylene.
Charles Drevna, who heads the National Petrochemical and Refiners Association describes it this way...
Mr. CHARLES DREVNA (National Petrochemical and Refiners Association): For lack of a better term, we make plastic pellets, and those plastic pellets, whether they're ethylene derived or propylene derived or whatever, are transformed into products that we use every day.
JOYCE: Chemical plants do the transforming. Kevin Swift is an economist with the American Chemical Council. He offers some examples.
Mr. KEVIN SWIFT (American Chemical Council): Food packaging, all sorts of films, trash bags, diapers, toys, housewares, crates, drums, bottles.
JOYCE: All from natural gas, whose price rose 40 percent over the last year, or oil, whose price roughly doubled.
Mr. SWIFT: ...piping, automotive antifreeze, pantyhose, carpets, clothing.
Mr. SWIFT: Yes.
JOYCE: And shampoo, bowling balls, buttons. And all these things, says Swift, follow the rules of economics.
Mr. SWIFT: Economic theory tells us that ultimately the consumer will bear the cost and those costs just cascade right through the supply chain.
JOYCE: Actually, the price of oil and natural gas has gone up more than the price of gasoline or consumer goods that use them as feedstock. Charles Drevna from the refiners group suggests that people aren't buying as much stuff now.
Mr. DREVNA: Given where the economy is in general, it would lead me to believe that maybe there's not as much consumer confidence out there and demand may slightly be down, which would hold the prices down.
JOYCE: Okay. So maybe are putting off buying that new bowling ball, but demand for food isn't so flexible, and it takes a lot of petroleum to make food in America. One reason is how we move it around.
Mr. JOHN URBANCHUK (Agricultural Economist): So much of everything that we American consumers consume really spends a lot of time on the highway in trucks that burn diesel fuel.
JOYCE: That's John Urbanchuk, an agricultural economist with the California consulting company LECG.
Mr. URBANCHUK: There's been a tremendous transformation in the American economy over the last 25 years. People don't carry inventories of anything any longer. Our inventories are out there on the highway in 18-wheel trucks.
JOYCE: Trucks that burn diesel, and diesel prices are rising too.
How much does energy affect food prices? Urbanchuk did a study comparing a price hike for oil against the same price hike for corn, which in some form or another shows up in a lot of food. Oil had twice the effect on prices, he says. And that's not counting natural gas prices. Natural gas is used a lot in processing food.
Urbanchuk says 77 cents out of every consumer food dollar pays for what happens after food leaves the farm. Energy is a big part of that and it's a big part of the 23 cents the farmer gets. Ask Gerald Tumbleson(ph). He has 4,500 acres in Minnesota, mostly corn. He points out that it takes natural gas and oil to make and deliver fertilizers and herbicides. He also has to dry the corn using propane.
Corn, he concedes, is an energy-intensive crop, but Tumbleson says he may be better off than wheat or soybean farmers because corn is in just about everything we eat.
Mr. GERALD TUMBLESON (Farmer): You produce corn, which has multiple use, you have options. So that's probably why one of the reasons corn uses more energy because it gives you more versatility, so therefore you put more into it.
JOYCE: Right now corn's selling at a high price, so Tumbleson can pass on his higher fuel costs. What he and others who make things using oil and natural gas are wondering is how long before consumers stop buying.
Christopher Joyce, NPR News.
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