High oil costs trickle down the pipeline

Lisa Napoli Jan 18, 2008

High oil costs trickle down the pipeline

Lisa Napoli Jan 18, 2008


Tess Vigeland: If it feels like the dollars are fleeing your wallet faster than ever these days, it’s not your imagination. This week we learned that food and energy prices pushed inflation up by more than 4 percent last year. That’s the biggest jump since 1990.

A good chunk of the blame goes to high oil prices. This month they hit $100 a barrel for the first time and that means much more than just expensive gasoline at the pump.

We asked Marketplace’s Lisa Napoli to take a look at how our consumer pipeline is squeezed in ways you might not realize.

Lisa Napoli: This package of healthy veggie nuggets contains nothing but garbanzos, lentils, sunflower seeds, lemon juice. Not a trace of oil — unless you factor in just about everything that got all those ingredients to where this food was made and packaged, to me, so I could eat it for lunch.

Leslie Starus: We’re all connected in every way and sadly, we’re all connected to petroleum products.

That’s Leslie Starus. For 27 years her company’s been making healthy packaged foods. Stuff like tempeh burgers and veggie wraps and hummus. And lately, to make all that food is costing her a lot more than it used to.

She’s showing me around her warehouse in Sun Valley, California:

Starus: Petroleum-based products are in anything that has to do with packaging, which is what you’re seeing here: boxes and boxes of packaging. From the paper to the plastic containers we use to put our product into, they’ve risen at least 20 to 25 percent.

Then there are the raw ingredients, the vegetables and beans, which are trucked in from all over the country.

Starus: The cost of them per pound to buy has gone up at least 20 percent because of the same thing: the farmer has to pay more to process them.

It also costs more money to run the machines Starus uses in her facility. For as long as she could, she’s held steady on her prices to keep competitive. But at the end of last year, she finally had to raise them.

She’s not the only one. Bigger food suppliers like General Mills and Pillsbury have increased what they charge, too. In case you haven’t been paying attention at the grocery store, food prices are skyrocketing faster than anytime in the past 17 years:

Fred Kirschmann: We really have become such a fossil fuel society that we don’t realize all of the things that we use every day that are really based on a petroleum platform.

Fred Kirschmann is an agriculture professor at Iowa State University. He’s also an organic farmer. He says oil became essential to the food production process for a reason: it used to be cheap.

Kirschmann: It was understandable because oil was so seductive. Our industrial food system has made it easy to transport whole foods from around the world and get them to us any time of the year at a very affordable cost. It seemed like the whole future… that cheap energy would always be available.

Now that it’s not, everyone’s scrambling for ways to cut back or reconfigure and that’s causing different problems.

The price of flour has risen nearly 40 percent over the last few years because farmers aren’t growing as much wheat. That’s in part because they’re now planting corn to fuel the demand for ethanol.

Now, higher oil prices are taking their toll on much more than food. Late last year, Dow Chemicals said it’s shutting one of its plastic plants because of rising material costs.

You’ve probably noticed fuel surcharges being slapped on everything from taxi rides to plane tickets to anything you get delivered.

Severin Borenstein: An increase in oil prices ends up permeating the entire retail economy.

Severin Borenstein is an oil industry expert at the University of California, Berkeley.

Borenstein: When the price is, say, $60 higher than we thought it was going to be, when it’s up in the $90s instead of down in the $30s, that means the U.S. as a whole is paying an extra $1.2 billion a day for products. $1.2 billion translates to about $4 per person, per day.

Almost $1,500 a year more we’re spending. If you’re scoring at home, that’s $6,000 for a family of four.

As a sympathetic employer, Leslie Starus feels the pain:

Starus: Your employees are paying more for everything, like everyone else, but they’re hardly making it because you can’t give them the raise they deserve.

And it all traces back to the higher price of oil.

In Los Angeles, I’m Lisa Napoli for Marketplace Money.

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