Corporate America scrambles as oil heads to $100

BOSTON (Reuters) - As oil heads toward $100 per barrel, Corporate America is scrambling to offset the cost by cutting back on energy use where it can and pushing through higher prices where it can't.

Higher oil prices drive up corporate expenses from running factories to making petroleum-based chemicals. Companies in energy-intensive industries such as mining have also warned that oil prices are eroding their profits.

And they burn through consumers' spendable income as it costs more to run cars, heat homes and to buy airline tickets.

"There is a fascinating aspect of the extent to which we are still able to absorb these very sharp rises in price without any evident weakening. Now, eventually, that has got to stop," former Federal Reserve Chairman Alan Greenspan said in a speech here this week.

"If we go to a significantly further rise, it's going to impact," Greenspan said. "It's not possible that it will not because the sheer absorption of purchasing power ... will drain the American economy significantly. But we're not there yet."

On Friday, U.S. light crude oil futures were trading at $95.15 a barrel, up about $16 over the past month and up about 55 percent so far this year.

UP, UP AND AWAY

U.S. airlines have pushed through seven system-wide fare increases since September's Labor Day holiday. The most recent came on Wednesday when AMR Corp's (AMR.N) American Airlines raised continental U.S. round-trip fares by $20.

"Just since August, average spot market crude oil prices have risen by nearly $14 a barrel," American Airlines said in statement. "That increase translates into more than $1 billion of additional annual expense for American."

With the exception of Southwest Airlines Co (LUV.N), U.S. airlines are largely unprotected from the rise in fuel prices.

Southwest has hedged most of its expected jet fuel needs through next year at prices well below current levels. But its chairman, Herb Kelleher, worries about steadily rising oil prices.

"The United States is tremendously vulnerable to oil price shocks," Kelleher said in an interview on CNBC television on Thursday. "We're headed for a crisis insofar as our consumption of energy is concerned."

Newmont Mining (NEM.N), the world's second largest gold producer, raised estimates for costs applicable to sales for 2007, citing fuel as a factor.

Newmont's CEO Richard O'Brien told analysts on Wednesday the company uses about 3 million barrels of oil per year. Oil represents about 12 percent of Newmont's costs.

'CUTS BOTH WAYS'

Diversified industrials argue that higher oil prices can be a bane and a boon. While the cost pressure is undeniable, high prices have sparked spending by oil companies to increase demand as well as investments in energy efficiency.

For Caterpillar Inc (CAT.N), a maker of construction equipment, diesel engines and gas turbines, the spike in oil prices "cuts both ways," said spokesman Jim Dugan.

Rising oil and natural gas prices increase the Peoria, Illinois-based company's manufacturing costs, but Dugan said Caterpillar does not think overall market economics can support $100 a barrel oil prices.

Higher prices also lead Caterpillar's customers in the oil and gas business to step up drilling and pipeline construction and to buy new equipment.

Peter Klein, senior portfolio manager at Fifth Third Asset management, said corporate America would be able to stave off the effects of high oil prices for only so long. Fifth Third Asset, based in Cleveland, Ohio, manages $20 billion in assets and holds shares of conglomerates including General Electric Co (GE.N) and Honeywell International Inc (HON.N),

"Companies have done a good job of attempting to mitigate some of that by increasing their efficiencies," Klein said. "At some point there is a pass-through effect. You can only do so much and then you have to think about how you can maintain a margin."

He said Wall Street, currently focused on stock market volatility related to credit market turmoil, may be underestimating the importance of rising oil prices.

"It's the idea of the frog in the boiling water," Klein said. "If you throw a frog into boiling water, he jumps out. But if the heat is slowly turned up, you just don't notice the increase in pressure and temperature until it has overwhelmed you."

(Additional reporting by James B. Kelleher and Nick Carey in Chicago, Steve James and Chris Reiter in New York)