Business Grapples with Rising Oil Prices

With the price of oil topping $100 a barrel last week, the bottom line of companies in New Jersey and elsewhere is increasingly being squeezed. And there’s no magic bullet, say experts. While some businesses try to corral their costs with unique approaches, others may just have to put up with lower profit margins for now.

“It’s one thing to get the low-hanging fruit, like turning down thermostats and trying to drive less or drive more efficiently,” says Robert Loderstedt, CEO of New Jersey Manufacturing Extension Program Inc.(NJMEP) in Morris Plains. “Beyond that, forward-looking companies might want to look at their entire operations, including manufacturing machinery and processes, and their heating, ventilating and air-conditioning systems. They may also wish to examine energy alternatives like solar power.”

That’s what Aluminum Shapes LLC, a Pennsauken manufacturer, continues to do. The company buys electricity from a solar plant operated by PPL Renewable Energy, an Allentown, Pa.-based energy company. In 2004, Aluminum Shapes began its alternative energy approach by purchasing PPL electricity generated by methane gas.

Both arrangements enable Aluminum Shapes to reduce its energy-related operating costs while using a renewable power source, says Lissette Santana, a PPL spokeswoman.

Other cost-saving measures are also benefiting Aluminum Shapes now as oil prices rise, says Loderstedt. The company tapped Loderstedt’s organization and CamdenCountyCollege to remove waste from its manufacturing and operational processes.

“From February 2006 to June 2007, we did a full lean transformation of the company’s manufacturing processes,” he says. During the same period, the college provided supervisory training, welding technology and other services designed to improve Aluminum Shapes’ overall operations.

Some companies may be in a better position because of earlier decisions.

Large energy-intensive companies may have entered into hedging contracts and locked in a lower price for fuel for a specific time period, says J. Scott Susich, a Toms River-based senior partner with Energy Management Institute, a New York City-based consulting firm. “That’s one of the reasons Southwest Airlines Co. was able to remain profitable while other airlines were going bankrupt. But smaller companies often don’t have the volume or the capital to protect themselves with these kinds of contracts.”

Instead, those businesses may be limited to turning down the thermostat a few degrees.

“We’re holding down our heating bills by keeping the building a bit colder,” says a spokesman for Sims Pump Valve Co. Inc. in Hoboken. As a result of increased energy costs, Sims is facing price hikes on multiple fronts. It takes a lot of juice to run the business’ production machinery, and Sims is paying more for the raw materials that go into its water pumps and other products.

“We don’t have much ability to change our processes. Fortunately, as a specialty manufacturer, we’re able to pass on price increases to our customers,” says the spokesman who declined to give his name.

Other companies are not as fortunate.

“We’re paying higher prices for our raw materials, for our manufacturing-related energy costs, and for inbound and outbound delivery,” says Gene O’Malley, one of the owners of Garden State Precast. “But in a soft market we can’t pass the costs onto our customers. It’s eroding our bottom line.”

With the slumping housing market, the Farmingdale firm has experienced slower demand for its retaining walls, drainage systems and other products often used in public-works projects and housing developments.

The pinch from high energy costs may be a long-term condition, says Briance Mascarenhas, a management professor at the Rutgers School of Business-Camden.

“Cracking the $100-a-barrel barrier was as much of a psychological event as a financial one,” he observes. “But a weakening dollar and the increased demand for commodities from countries like China and India mean that prices are likely to continue to rise for a long time.”

Companies that have a lot of market clout can probably pass the costs on to their customers, adds Mascarenhas.