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The spike in gas prices is the last thing Detroit needs now, especially General Motors, which had been banking on the launch of redesigned, full-size SUVs like the Chevy Tahoe, GMC Yukon and Cadillac Escalade to help boost sales this year. A few years ago, automakers could count on a core group of 1.5 million households to buy full-size SUVs, according to Art Spinella, president of CNW Marketing Research. Even before this year, higher gas prices had eroded that market. Only about 700,000 U.S. households are now in the market for full-size models. That's why automakers are switching to crossover vehicles like GM's Pontiac Torrent and Ford's Ecosport.
Oil-dependent industries that had been absorbing higher costs are also beginning to suffer. Consider the chemical industry, which needs petroleum as a feedstock, or raw material, for such products as polyvinyl chloride (for plastic pipe) and polyethylene terephthalate (for soda bottles). "You see the biggest impact across the board in plastics," says Morningstar analyst Sumit Desai. Back in 2003, hydrocarbon feedstocks and energy accounted for 36% of Dow Chemical's total costs. Last year they ate up 47% of total costs, yet the company still managed an earnings increase. But Dow reported this week that first-quarter net income fell 10% from a year ago, to $1.21 billion, despite a 3% growth in revenue, which hit $12 billion. Dow's net income dropped mostly because the cost of energy and oil-derived raw materials increased more than $800 million in the quarter. One way chemical companies are dealing with rising energy costs is to move production overseas, particularly to the Middle East, where they pay less for energy. Dow is one of the companies doing that, putting U.S. plants in jeopardy.
Economists are worried that companies are reaching the limit of being able to transfer energy-price increases to their customers in the form of surcharges. FedEx just raised its fuel surcharge on air deliveries from 12% to 13.5%. Even local pizza parlors, which have been adding a dollar or two to the bill, will reach the push-back point if the upward trend continues. "The pain at the pump this summer is going to be on truckers, taxi drivers, limo drivers, airlines, shipping companies. The question is, Do they pass it on?" says Joe Stanislaw, an independent energy adviser for clients of Deloitte & Touche.
Not everyone is unhappy with high oil prices. Besides oil companies, these are boom times for oil-field-service firms like Schlumberger, whose oil-field revenue is up 34% over last year's first quarter, and high-tech equipment makers like Baker Hughes (up 89%). Rig activity is so strong and demand for energy services so unprecedented, according to Dave Lesar, CEO of Halliburton Co., the Vice President's former outfit, that the oil-field-service conglomerate started raising prices this month. So have others. Oil-drilling ships are renting for $500,000 a day, double the charge of 18 months ago. "The price of oil is a transfer of wealth from the consumers to the producers," says Brian Gambill, senior analyst of Manning & Napier Advisors, an investment firm. "And the producers transfer their wealth to the oil-service companies because they don't have many of the technological capabilities that the service companies have."