Oil prices up again over $US134 a barrel, Qantas and Air New Zealand cut services and switch planes to save fuel and both companies warn of worse to come; JetBlue, a US discount airline puts off buying 21 new Airbus jetliners for four to five years and cuts flights; and then the bombshell, the giant US company, Dow Chemical reveals a 20% rise in the cost of all its products from this Sunday, June 1.

Welcome to another bad day for the world’s economies.

Last week the Ford Motor Company revealed that it is reshaping its future by cutting back on production of gas guzzlers and boosting output of more fuel efficient smaller cars, at a cost of a two year delay to its return to profits.

Last night it was Dow, like Qantas and airlines around the world, reacting in the only way possible by lifting prices: next will come job cuts and other cost cutting measures. Like Ford’s announcement last week, Dow’s price rise news came as a shock to US business. Gone are the days of trying to be an efficient, low cost producer: it’s all companies for themselves because the rising cost of doing business, especially from oil, has made pressures untenable.

The Australian-born CEO of Dow, Andrew Liveris, said a failure by the US government to address rising fuel costs was causing a “true energy crisis, one that is causing serious harm to America’s manufacturing sector and all consumers of energy.”

He said energy prices were “putting a strain on the entire value chain.”

“Our first quarter feedstock and energy bill leapt a staggering 42 percent year over year, and that trajectory has continued, with the cost of oil and natural gas climbing ever higher,” Liveris said in the statement.

“The new level of hydrocarbons and energy costs is putting a strain on the entire value chain and is forcing difficult discussions with customers about resetting the value proposition for our products.”

Dow said that in 2002 it spent $US8 billion on energy and hydrocarbon-based feedstock costs: at the current rate, those costs would climb to $US32 billion this year. Seeing Dow has annual sales of around $US54 billion, the surge in energy costs would cripple the company without some move to cost recovery.

Without too much of a fuss, yields on US 10 year bonds have surged 0.70% since the dark days of March when panic ruled amid the rescue of Bear Stearns. The bond markets are also telling us that despite the continuing strains in financial markets from the credit crunch, inflation is now a major problem, even if there’s little or no economic growth.

Yields on US 10 year Government bonds bounce upwards to 4% for the first time since January as the hardheads in the bond markets figure that the higher oil prices and moves by the likes of Dow will mean higher US interest rates because stagflation is back gripping the country.

Here in Australia, our politicians are bickering about GST and excise cuts on fuel while business is pointing to where the future lies: high energy and other costs. High energy costs are here to stay and we had better get used to it.

For a country making more than a good living off rising prices for coal, gas and oil, not to mention wheat, barley, copper, lead and a host of other commodities, we have a hide to be complaining.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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