Supply Chain

When the Price of Fuel Is Cruel

Rising costs are pushing some companies to tap into creative ways to cut energy costs, including dusting off some older ideas.
Harlyn AizleyMay 16, 2005

These days, it’s not just airlines and overnight-delivery companies that worry about fuel prices: everyone is in the energy-management business.

Recent increases in the cost of retail and industrial energy — natural gas, electricity, and especially oil — have affected all areas of commerce, from hospitals to packaging companies. And prices are expected to keep rising.

Crude-oil prices, which are up 66 percent from last year as of April 1, could continue to escalate. Goldman Sachs energy analyst Arjun Murti recently increased his upper limit on estimated oil prices to $105 a barrel. In adjusted dollars, that would be almost as high as prices during the oil crisis of the 1970s.

Rising costs are pushing some companies to tap into creative ways to cut energy costs, including dusting off some older ideas. For example, Caraustar Industries Inc., one of the largest manufacturers and converters of recycled paperboard, uses a system that allows production to move between fuel oil and natural gas. The company, which uses an energy-intensive production method, can switch to the cheaper of the two. “We can switch within hours,” states CFO Ron Domanico. The company also buys forward contracts on natural gas. “Last year we were hedged about 30 percent of our natural gas requirement,” he says.

Costs related to energy increased $207 million in 2004 at aluminum producer Alcoa, with about $125 million in additional costs predicted for 2005. “In the short term, we plan to make improvements in productivity, better procurement, and restructuring of operations, including staffing,” says Alcoa director of corporate communications Kevin Lowery. “Long-term plans include exploring expansion opportunities in areas with lower cost or globally competitive energy.” Alcoa recently broke ground on a smelter in Iceland to capture glacial run-off, which can be used as a source of hydropower.

While high energy costs will hurt profits at lots of companies, others are finding they can ease the pain. Caraustar’s combination of focused hedging and reduced usage, for example, has produced a result most companies would envy. Claims Domanico: “Year over year, energy costs have been flat for us.”