Monday, June 9, 2008

High oil prices soon to hit consumer wallets harder

The New York Times reports that record high prices for oil, which thus far haven't had much of an inflationary impact, will soon be hitting consumers where it hurts.

With the obvious exception of gasoline, Joe and Jane Sixpack been relatively shielded from the massive run-up in oil prices, as manufacturers and distributors absorb the increases by cutting profit margins. However, with profits of American businesses already dropping 6% in the last year, Friday's record high oil price of $138.54 may be the straw that breaks the camel's back in terms of forcing business to hike prices if they want to stay in the black.

In addition to transportation costs, businesses are facing rising prices for products derived from oil and petrochemicals, meaning everything from plastics and synthetic rubber to fertilizers used in agriculture. For example, Dow Chemical, which turns oil and gas into the materials to make plastic, last month raised prices by an unprecedented 20% across the board. That jump will be passed along to thousands of downstream businesses and ultimately to end users.

In the greater scheme of things, higher oil and petrochemical costs can be expected to have all kinds of environmental and societal benefits. Companies will use less packaging in their products, recycling will become cheaper than buying new, and cutting waste will become mission number one in industries of all types. in the short term however, with jobs disappearing, home foreclosures skyrocketing, and driving becoming an expensive luxury, inflation on everything from soap to soup to sandals is likely make things tough for a lot of people.

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