Oil cost ripples across economy.

Sergio Quinones watches oil prices like a hawk.

The owner of Cohe Chem Labs, Quinones uses petroleum products to manufacture most all of the company's private-label cosmetics and hair care products--and the recent spurt in oil has left him in a quandary: How much to absorb and how much to pass onto his customers?

It's a question many manufacturers are asking these days.

Until recently, goods producers have been reluctant to raise prices, opting to cut workers or find other ways to increase efficiencies. But as the economy has strengthened, more appear willing to risk being undercut--so much so that the Federal Reserve raised its inflation alarm last week, much to the dismay of Wall Street.

Still, for executives like Pico Rivera-based Quinones, raising prices is no easy task. About 85 percent of his products use mineral oil, petroleum jelly or waxes derived from crude oil; his competitors that use vegetable oils in their products aren't subject to wild swings in energy prices. Switching would be costly, so for now, Quinones is simply absorbing much of the cost.

"I would have to change the product formulations, the packaging, and it would change the abilities of the product, so we'd have to test it," said Quinones, who pays about 50 percent more for the ton of wax he uses monthly. "I couldn't replace them because of the cost."

Oil's impact

While oil prices don't carry the same impact they did in the 1970s, they remain an important factor in the economy.

Last week, the U.S. Labor Department reported that the consumer price index rose 0.4 percent in February from January, the fastest growth since October. Energy prices were a leading contributor to the price hike but other sectors went up as well, leading to concern among some economists about cost pressures that could spur the Fed to become more aggressive in raising interest rates.

Compared with a year ago, average prices were 3 percent higher.

While raw materials prices have been rising in general, oil is scoring a direct hit on companies that make everything from foam packaging to cutting boards, from pesticides and fertilizers to tires.

Jim Haw, a professor of chemistry at USC, said that when pump prices rise, refineries dedicate more of their lightweight distillates to gasoline production--causing scarcity and higher prices for other distillates such as ethylene and propylene.

"Refineries make the decision of how much gasoline they make versus other chemicals, and they have some control," he said. "If everyone wants to buy your gasoline, the price of ethylene or propylene has to go up for you to keep making them."

The price increases ripple through the producers' food chain.

Jeff Naples, president of Sylmar-based Atlas Foam Products, finds himself in the middle. His company manufactures foam packaging materials used to pack TVs and stereos into shipping boxes. He purchases raw material from a producer that, in turn, purchases its materials from Bayer MaterialScience AG, a chemical production unit of Germany's Bayer AG.

Eight months ago, Bayer MaterialScience, citing rising oil costs, sharply raised the prices of the petrochemicals it supplies to Naples' supplier, Foamex International Inc.

Between January and December 2004, the price of benzene went up 100 percent, propylene was up 95 percent, toluene was up 62 percent and chlorine was up 60 percent, according to Bayer's letter to Foamex.

For Naples, raw foam from Foamex went up about 10 percent in June, 9 percent in September, 10 percent in December, and 12 percent in February. At the end of this month, his supplier told him it would go up another 11 percent.

"In some of the earlier price increases, we would try to absorb it, but it's so high, it's to the point where we've got to pass it along," Naples said. "My big customers have custom boxes so they have the foam insulation totally integrated into their processes. So we're insulated, but it's still not pleasant to have to raise prices. We have customers we've had for years."

A relatively healthy economy is playing a factor as well. Unlike several years ago, when excess factory capacity was preventing U.S. businesses from passing along those extra costs, the current growth climate is creating more maneuverability. A February survey by PNC Financial Services Group found that half of the small and midsize businesses surveyed planned to pass along cost increases to their customers--about double the level of two years ago.

Ultimately, costs that can't be offset will filter through the economy to consumers.

Alegacy Foodservice Group Inc., a family-run manufacturer of commercial cookware in Dominguez Hills, has been passing along the higher prices to its hotel and restaurant clients.

The cutting boards, fast-food baskets and ketchup squeeze-bottles Alegacy makes from polyethylene, one of the most common petrochemical-based plastics, can't be feasibly replaced, according to company president Brett Gross.

Finding shortcuts 

"The plastic cutting boards are required by health departments. They've replaced wood because they're cleanable and sanitary, so there's up other choice," said Gross, who uses a few thousand pounds of the plastic a month. "With bottles and baskets, plastic is already the cheapest material. We can't replace it with metal or glass."

While business is booming, Alegacy is trying to find efficiencies to offset some of its higher materials costs such as aluminum, whose price has risen by about 50 percent over the past year.

Gross wants to cut production costs by 20 percent when Alegacy moves to a 113,000-square-foot facility in Santa Fe Springs this summer, nearly doubling its size, and implementing new efficient technology and improved layout.

Another approach being taken by companies with enough cash and storage capacity is stockpiling raw plastics or chemicals in anticipation of rising prices.

"I'm working with one injection-molding company in Compton that hedged their bets and started buying raw plastic pellets in bulk and bringing in train cars to their railroad spur before the surge in pricing," said Gerald Church, a consultant with California Manufacturing Technology Consulting, a Gardena-based non-profit that gives technical assistance to small- and medium-sized manufacturers.

Whatever the current inflationary effects turn out to be, no one expects them to rival the price rises of three decades ago--not with intense competition from overseas, as well as more cost-conscious ways of doing business.