Volume 11 | Issue 4 | Year 2008

Oil anxiety related to price and possible economic consequences escalate with each cost-per-barrel increase and price-jump at the gas pump – increases that seem to occur on a daily basis. By early summer 2008, fears were further fueled by rampant rumors of $200-barrel price tags, a previously unthinkable benchmark that came well within the realm of possibility.
Both consumers and business are justifiably concerned; rising energy costs affect them both directly and indirectly. Some businesses are more directly impacted than others – like Lunday-
Thagard Company. The South Gate, Calif.-based enterprise is an oil refinery, and crude is a core element in its main products. “We specialize in asphalt paving and roofing products,” says John Wasner, the company’s vice president of refining. “Specifically, we make the liquid asphalt that our customers purchase to mix with sand and gravel toward the making of roads. Our roofing customers take the liquid asphalt to their plants, where they use it to make shingles. Also, one of our specialty products is the high-melt asphalt used for projects such as flat roofing.”

Related increases in such products represent just one of seemingly countless ways oil prices are shaping the nation’s economy, its industrial production and, in turn, its infrastructure. “This summer, it cost twice as much to re-roof a building as it did last summer. That’s how bad things have become,” indicates Wasner. “As far as road projects, people are postponing them until next year, in hopes that things get better.”

The situation is particularly hard on municipalities, Wasner relates. Most of their paving-project costs are determined as much as a year to 18 months in advance. Now, they’re facing oil-related costs that have doubled since initial assessments. Municipality residents soon comprehend the reality.

“The average consumer only looks as far as the gas station pump, and they usually don’t think about how rising oil prices impact them in other ways. Then, all of a sudden, the street in front of their homes cost twice as much to repair,” Wasner comments.

Chances are the street may not even get fixed at all, he adds: “Municipalities may have 10 streets that need paving, but they’re only able to work on five, because of rapidly rising costs. Further, they may not even do the work at all and only do some patching or slurry overlays and similar quick fixes.”

Meanwhile, Lunday-Thagard Company isn’t responding to the situation by just sitting on its hands. Instead, it has sought ways to control expenses and, in turn, reduce the price increases typically passed on to customers.

Established in 1937, the company refines its oil and manufactures its products at its South Gate facility, a modestly sized refinery with an 8,500 barrel-a-day capacity. Facilities include an air-blown asphalt plant with four stills deployed in the production of roofing asphalt materials, according to Wasner. In 2007, Lunday-Thagard, a subsidiary of the World Oil Company (established in 1940 and also headquartered in South Gate), discovered that it was losing about $80,000 a year in unnecessary energy costs because of defective steam traps. An integral component in Lunday-Thagard production, the devices capture condensing water used to heat industrial machinery. Specifically, the company uses the steam to heat the oil used in asphalt production.

Apprised of the problem, Lunday-Thagard replaced a number of traps, a remedy that saved the company nearly $100,000 a year. Further, installation of the new traps entailed only minimal financial output, as Lunday-Thagard benefited from an arrangement with the Southern California Gas Company (SCGC), a Los Angeles based utility owned by Sempra Energy. Collaborating with the Los Angeles Department of Water and Power and Southern California Edison Co., SCGC was offering business customers rebates on energy-saving measures. As it turned out, the gas company offered a $200 rebate for each of Lunday-Thagard’s traps, which only cost about $240 to begin with.

However, Lunday-Thagard not only replaced the traps, but it invested heavily in the installation of a more efficient boiler and new insulation. “That cost us about $2 million,” informs Wasner.

True, the initial cost was high, but the investment will be well worth it over the long run: The company ultimately will save millions through these upgrades. “We’re definitely excited about the large energy savings,” says Wasner. “We’ll be able to reduce our gas consumption by about $1million each year. But that was calculated by gas prices for 2007. Since then, the price has just about doubled. So, obviously, this is turning out to be a substantial accomplishment.”

In all, Lunday-Thagard benefited from nearly $200,000 in SCGC rebates. This came about after its executives attended an energyefficiency Expo set up by Sempra. SCGC provided the rebates after examining Lunday-Thagard facilities and providing energy saving recommendations.

Lunday-Thagard not only benefited from the rebates, but SCGC presented it with the “Project of the Year” award. “As the project involved substantial insulating upgrades to save therms, we reduced our carbon footprint and helped reduce greenhouse gas emissions into the environment,” reports Wasner. “SCGC recognized us for that achievement.”

SCGC, the nation’s largest natural gas utility (serving 20 million California consumers), expects to distribute as much as $18 million in 2008 in rebates and other incentives for commercial and industrial users. The program is part of statewide efforts to reduce carbon emissions related to global warming. In late 2006, California lawmakers approved a proposal to reduce greenhouse gas emissions 25 percent by 2020. The initiative strongly encourages state utilities to offer rebates and other incentives to companies that demonstrate a willingness to convert to energy-efficient technology.

But Wasner is looking at the overall picture – as far as energy demand, consumption and pricing – and he sees a need for stabilization. “Recently, we’ve witnessed wild twists and turns in the cost of crude, and these have been happening each day,” he says. “No business can function properly when prices of their raw materials undergo extreme daily fluctuations. You not only have to take into consideration the material costs but the related transportation costs. For instance, there are significant diesel surcharges involved with the trucks that carry raw material in and then take the product out.”

So, what it comes down to is achieving stability in crude prices, he believes. “If prices would stabilize, business could operate more efficiently and cost effectively, but the prices won’t let us do that. This hurts business and, in turn, the economy and the country,” he observes.

But how can this be done? Wasner provides an answer from an insider’s perspective. “It all comes down to speculation,” he says.

More so than the demand vs. supply element, or the apparent whims of large oil company executives or the seeming capriciousness of OPEC, the rising price of oil is a direct result of speculators. “We need to find a way to control speculation,” says Wasner. “After all, look what speculation did to the housing market. You can see what that has done to the country.”

Essentially, this is how it has worked in recent weeks: With each new rumor about an impending U.S. strike on Iran, speculators – merrily, it seems – raise the per-barrel price of oil to increasingly astronomical levels. Someone’s profiting from this practice, but it certainly isn’t companies like Lunday-Thagard.

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