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The Honolulu Advertiser
Posted on: Thursday, December 15, 2005

Americans likely to continue paying high energy prices

By BRAD FOSS
Associated Press

Steve King, president of chemical manufacturer Tomah3 Products in Wisconsin, and other executives across the country have struggled to compensate for rising energy expenses.

ASSOCIATED PRESS LIBRARY PHOTO | November 2005

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WASHINGTON — Terry Grandchamp's Virginia home-remodeling business is booked through spring and he's planning to bump up his prices to help cover the high cost of gasoline and building materials. But when it comes to his own finances there is no passing the buck, so Grandchamp is doing his best to conserve fuel at home and on the road.

Chemical maker Tomah3 Products Inc. of Wisconsin is somewhat less confident customers will continue to absorb the soaring price of natural gas in 2006. That's forced company president Steve King to shrink his workforce through attrition and hire a commodity broker to manage his fuel purchases.

At North Carolina-based Family Dollar Stores Inc., the biggest worry these days is that the already tight budgets of low-income shoppers will be nearly busted by the expected surge in home-heating costs this winter. The company aims to stabilize itself by selling fewer discretionary goods and more essentials such as food and health products.

Such is life for consumers and companies grappling with the prospect that today's high energy prices may stick around. Crude-oil prices, while sharply below the 2005 peak of almost $71 a barrel in August, are expected to average more than $55 a barrel through the end of next year and potentially longer than that. That is more than 2 1/2 times the $19.70 a barrel that crude-oil futures averaged during the 1990s, and about 60 percent more than the average price since 2000.

It's probably not enough to cripple the economy in 2006, but stubbornly high prices for oil and natural gas could stunt growth and increase inflationary pressures for the second year in a row. With supplies still relatively tight, there is always the risk of a more severe energy-related economic shock if there were a major disruption like the most recent hurricane season.

Economists say the more likely scenario is that Americans will begin to breathe a little easier by the second half of the year. That's because they already will have absorbed much of the pain of a multiyear run-up in prices and will benefit from stable, if not falling, energy costs.

From airlines to manufacturers to retailers, "we're seeing a lot of emphasis on conservation in business," said Stephen P. Brown, an economist at the Federal Reserve Bank in Dallas. Companies that weren't already making changes before hurricanes Katrina and Rita are doing so now because they saw how tight supplies are and how easily a disruption could push up prices, he said.

At the consumer level, Brown sees the discounting of SUVs and the premiums auto dealers are charging for gas-electric hybrids as the early signs of a slow but significant change.

"These things take time," he said. "Quite often, people mistake the amount of time it takes to adjust to prices as evidence of society not responding."

Tomah3 Products, which manufactures chemicals used in industrial cleaning fluids, has adjusted grudgingly to the high price of energy. Natural gas, which the company uses to heat its boilers, is about twice as expensive as last year, while the cost of the petrochemicals Tomah3 uses as raw materials is up by about 50 percent.

Company president King said he's increased the price of his finished products more than a dozen times since the summer of 2004, but that it hasn't fully offset the jump in expenses. King has tried to make up the difference at factories in Milton, Wis., and Reserve, La., by operating with 5 percent fewer workers, but profit growth is lagging.

"I've assimilated the hit," King said. "I've passed along most of what I can and now I'm prepared to live with it. But in my opinion, prices will come down."

Oil prices are forecast to average $58 a barrel in 2006. While that is up slightly from $57 a barrel in 2005, the good news, according to several economists, is that prices are expected to fall in the back half of 2006.