July 4, 2008

Rising price of oil affects more than just the price of gas

Construction Corner

Korky Koroluk

With skyrocketing gasoline prices increasing the cost of the daily commute, it’s easy to forget that high energy prices are affecting everything.

A lot has been written about food costs rising because of higher costs to the farmer, the processor, and, finally, to the trucker who hauls it all to your local supermarket.

It seems likely to get worse before it gets better.

Many of you will have read the recent report by CIBC World Markets economists Jeff Rubin and Benjamin Tal, which predicts that oil will reach $200 a barrel by 2010, and gasoline at $7 (U.S.) a gallon, or $1.85 to $2 a litre in Canada.

One result, says the report, is that by 2012 there will be 10 million fewer cars on the road in the United States. And, although it’s not mentioned in the report, Tal said there will be 700,000 fewer vehicles in Canada. That’s because we have better public transit than the U.S.

Transit buses burn diesel, and the price of that is moving up in lockstep with the price of gas. In Ottawa, where I live and work, a one-cent increase in the price of diesel means an additional expenditure of about $400,000 a year for the city.

With everyone screaming about the price of gasoline, how many people are screaming (publicly, at least) about the price of diesel? Yet it’s diesel that powers the construction industry — and the industries that supply it. Prices of other carbon-based fuels are increasing too, so you have to consider the added cost of the energy embodied in a tonne of steel, for example, or a tonne of cement.

But all materials on every construction job have energy embodied in them. That’s why I wondered about some of the stuff that construction firms use regularly, but which the buying public is scarcely aware of — things like waterproofing and adhesives, for example, or roof coatings and corrosion protection.

I got a jolt when I went to the Dow Chemical Co. Web site for a quick look-around.

There I found an announcement dated May 28 saying that the price of all the company’s products was to increase by up to 20 per cent “depending on their exposure to rising energy, feedstock and transportation costs.”

Dow CEO Andrew Liveris is quoted as saying that energy costs in the year’s first quarter were up 42 per cent year over year, “and that trajectory has continued.”

Drastic as that sounds, there was worse to come. The next item I found was dated June 24, and announced that Dow “will raise the price of its products by as much as an additional 25 per cent in July in an effort to offset the continuing relentless rise of the cost of energy and hydrocarbon feedstocks.”

Beginning Aug. 1, the announcement said, there will also be a freight surcharge of $300 per shipment by truck and $600 per shipment by rail, applying to North American customers buying chemicals, hydrocarbons and plastics.

As well, the company plans to either reduce production at some plants or close them temporarily.

Liveris was quoted again, saying that the steps were “extremely unwelcome but entirely unavoidable.”

That’s just one company, and a big one at that, with, presumably, pockets deep enough to be able to withstand a period of financial stress. But there are many, many smaller manufacturers whose pockets aren’t as deep.

Dow, for example, is able to boast that it improved energy efficiency by 22 per cent from 1995 to 2005, and are looking to achieve a further 25 per cent by 2015.

All this means that estimating a job (never simple) has become even more complex. Coming up with a price that is good for, say, 90 days, is tough when volatile energy prices affect so many line items.

There is an ancient Chinese malediction: “May you live in interesting times.”

Well, that’s what we’re doing now.

Korky Koroluk is an Ottawa-based freelance writer. Send comments to editor@dailycommercialnews.com

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