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By Robert Rapier on Jun 16, 2008 with no responses

How Oil Prices Impact Almost Everything

There is a very informative story in the Dallas Morning News today covering what I recently discussed in The Ripple Effect:

Shoppers pay as oil costs trickle down

Ripple effect, trickle down effect – it all amounts to the same idea: There are few aspects of modern life that aren’t dependent upon oil. From the article:

“So far we haven’t seen much percolation of energy prices through to retail. That’s so far,” said Stephen Brown, director of energy economics for the Dallas Federal Reserve Bank. But some increases are inevitable.

And they’ll show up in products that most people don’t associate with black gunk from the ground. For Kevin Brown, an economist with the American Chemistry Council, the iconic product is a plastic bottle of shampoo. Aside from the water, 100 percent of the value of the ingredients comes from oil- or natural-gas-based products.

“That bottle is made of high-density polycarbonate. The cap is made from another plastic. The label is a composite of plastic resin and paper. The ink on that paper is petroleum-derived. The glue on the back is petroleum-derived. Now let’s look inside the bottle, at the surfactants, emulsifiers and fragrances,” he said.

“It’s all petrochemistry.”

He has calculated the value of the petro-ingredients of a variety of products: Tires, 62 percent (from the artificial rubber to carbon blacking); a vacuum cleaner, 30 percent (many plastic parts); lipstick, 100 percent (from the paraffin wax to the dyes and fragrances). Even paper, which mostly grows on trees, owes about a quarter of the cost of its materials to petro-products needed to convert pulp into pages, he said.

It may be a bigger challenge to find alternatives for the oil in tires and plastics than to find alternatives for oil as a fuel.

The article also discusses sky-rocketing asphalt prices. Not only is the cost of asphalt going up because the price of oil is going up, but many refiners are installing cokers to turn asphalt into liquid fuels. That will continue to take place until the price of asphalt is such that some refiners start to decide there is more money in the asphalt market than by further processing it.

This all points to more inflation, as the cost of oil works its way through to price increases throughout other sectors. This is also why I am not optimistic that the economy is going to recover soon – we simply have not seen the effects of $130 oil.