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Goodyear among companies feeling the squeeze from using raw materials
By Louis Uchitelle
New York Times
Published on Sunday, Jun 08, 2008
Surging oil prices are beginning to cut into the profits of a wide range of American businesses, pushing many to raise prices and maneuver aggressively to offset the rising cost of merchandise made from petroleum.
Airlines, package shippers and car owners are no longer the only ones being squeezed by the ever-mounting price of oil.
Companies that make goods using raw materials derived from oil, like tires, toiletries, plastic packaging and computer screens, are watching their costs skyrocket, and they find themselves forced into unpleasant choices: Should they raise prices, shift to less costly procedures, cut workers, or all three?
The Goodyear Tire and Rubber Co. is trying to adapt.
''Our strategy is to raise prices and improve the mix to offset the cost of raw materials,'' said Keith Price, a Goodyear spokesman. ''No one has predicted how long we can continue to do that.''
The sense that many companies might be hitting a wall is palpable. Corporate profits peaked last spring and have shrunk since then, Moody's Economy.com reports, drawing on Commerce Department data.
The housing crisis and the weakening economy are reasons, but oil prices are adding greatly to the pressure on profits as retailers fail to pass along higher prices to consumers. That helps to explain why expensive oil has not yet pushed up the inflation rate.
With the vise on corporate profits tightening and the price of oil continuing to climb, more dire action, job cuts and even higher prices, might be in store, economists say, although there is still room to avoid such steps.
''Companies came into this period with extraordinarily high profit margins,'' said Edward McKelvey, chief domestic economist at Goldman Sachs, ''and some of the surge in raw-material costs will be absorbed by lowering those profits.''
Still, the prevailing attitude that the economy could just keep absorbing higher oil prices is being tested — for the first time in nearly 30 years.
''The conventional wisdom a couple of years ago was that oil did not have that much leverage over the economy,'' said Daniel Yergin, chairman of Cambridge Energy Research Associates. ''But now it plainly does.''
Goodyear has kept its head above water in part by passing along some of the higher prices to dealers. The dealers, however, have not been able to pass along all of those increases to consumers and are absorbing the difference in lower profits.
Since last spring, the average profits of the nation's corporations — from behemoths like Goodyear to small neighborhood retailers — have declined at an annual rate of nearly 6 percent, government data show.
Surging oil prices are beginning to cut into the profits of a wide range of American businesses, pushing many to raise prices and maneuver aggressively to offset the rising cost of merchandise made from petroleum.
Get the full article here.
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