Energy prices continue to haunt buyers

New oil price forecasts show higher prices coming

By Dave Hannon -- Purchasing, 6/10/2008 1:07:00 PM

Energy prices continue to be a major thorn in buyers’ sides as oil, gas, diesel and other energy products continue to set new records almost daily.

In Purchasingdata.com’s monthly business survey, 91% of buyers polled said energy prices had increased in the past month, while the remaining 9% said they were flat. Not a single buyer said energy prices had declined. 

According to a recent Citigroup oil price forecast, Brent oil will increase 22%, due to the “continued erosion of non-OPEC supply.” Bloomberg reports that Citigroup increased its 2008 Brent forecast to $116.60/barrel, from an earlier estimate of $95.40. Citigroup lifted its 2009 oil estimate to $122.50/barrel and its 2010 expectation to $100, from $88 and $75, respectively.  Merrill Lynch raised its forecast by 14% to $114.

Perhaps hardest hit by the record energy prices are buyers in the chemicals industry, as witnessed both by the producers’ rash of price increases and by buyer comments in Purchasing’s June survey. “The chemicals sector is extremely tight, with monthly price increases pegged to escalating energy pricing,” says the director of global sourcing at a manufacturer in Cincinnati. 

“Chemical prices go up monthly and you can not get price guarantee at all,” says another buyer in Purchasing’s survey.

“The paper industry is having a difficult time, mainly due the cost of chemicals and energy costs,” says the purchasing administrator at a New York paper firm. Not surprisingly, buying plans for energy are flat, as 80% of buyers polled said they planned to keep energy spending flat or decrease it. That matches up with a recent report from the International Energy Agency which says cut its oil demand outlook for 2008 demand by about 70,000 barrels a day to 86.77 million barrels. “This is mainly as a response to the high prices,'' said Fatih Birol, chief economist of the IEA.

The long-term outlook for energy prices may depend on macroeconomics and trends in demand for oil and other energy products. And demand may fall in the long-term may fall further as many automakers are cutting SUV production and ramping up production of hybrid vehicles. General Motors followed Ford’s lead and recently closed four truck and SUV plants in North America, citing long-term fuel prices’ impact on consumer behavior.

According to this week’s data from the Energy Information Administration, the national average price for a gallon of gasoline topped $4 for the first time this week, while diesel prices dipped slightly to $4.69.

“These prices are changing consumer behavior and changing it rapidly,” Rick Wagoner, CEO of GM said before its annual meeting in Wilmington, Del. “We don’t believe it’s a spike or a temporary shift. We believe it is permanent.”

According to some reports, the current wait to buy the industry’s leading hybrid vehicle, the Toyota Prius, can be as long as six months. "We can't get them in fast enough," said auto dealer Herb Chambers, owner of Herb Chambers Cos., based in Somerville, Mass. in a recent Boston Globe article. "We could sell six or eight times as many Priuses if we could get the product from the manufacturer," he said.

WHAT DO YOU THINK?

Are energy prices hampering your sourcing or production work? Please take a moment to fill out this short online survey to provide us with your feedback.

SURVEY: ENERGY’S IMPACT ON PRODUCTION