From the Wall Street Journal/Yahoo News

The highest oil prices in years are increasing expenses for companies that had grown used to low energy costs since crude’s 2014 tumble, while the turnabout is proving to be a boon for some businesses.

Giant outfits from American Airlines Group Inc. to 3M Co. have warned this week about how persistent higher oil prices are boosting their expenses this year.

In response, some companies are looking to pass on the costs to their customers, which would push inflation higher. That, in turn, could slow growth and weigh on an already vulnerable stock market.

“I do believe that consumers will pay more,” said American Airlines Chief Executive Doug Parker.

The airline on Thursday lowered its profit outlook for the year, citing in part a 12% increase in the average price of jet fuel over the past two weeks. Fuel is airlines’ second-largest expense after labor, and fare changes tend to lag movements in oil by several months. Mr. Parker said he didn’t think higher fares would hurt demand.

The increased energy costs hurt in the first quarter because West Texas Intermediate crude prices have remained above $60 for much of the year, something not seen since late 2014. Higher energy prices hit different industries over time, and it can take weeks or months before they can pass their higher costs on to consumers or vendors.

Railroad operator Union Pacific Corp. reported Thursday that its fuel expenses surged 28% to $589 million in the latest quarter, with most of the increase coming from a 22% increase in diesel prices. However, Union Pacific passed along some of that higher cost to customers through fuel surcharges, which totaled $353 million, up 67% from the year-earlier period.

The company, though, also benefited from higher demand for sand used in shale-oil extraction and a surge in shipments of crude, as higher oil prices spurred production. Union Pacific, which operates in the western U.S. where much of the shale exploration occurs, said its energy revenue jumped by 15% in the March quarter from the year-ago period, growing twice as fast as its overall business.

Elsewhere, United Parcel Service Inc. said its fuel expenses jumped 21%, or $129 million, in the March quarter. But the company said fuel surcharges and higher prices helped offset rising delivery costs in its U.S. ground business.

Rising diesel prices are weighing on trucking companies despite a surging freight market, though some of those costs also get passed on through fuel surcharges.

On Thursday, Schneider National Inc., a large trucking company based in Green Bay, Wis., reported its fuel expenses rose 16% in the first quarter to $84.7 million. The carrier’s revenue from fuel surcharges to customers jumped by 31% to $117.8 million.

USA Truck Inc., another national carrier, reported $13.5 million in fuel expenses for the quarter, up 25% year-over-year. The Van Buren, Ark.-based company said rising fuel was among several factors offsetting strong freight demand.

Meanwhile, earnings at energy companies have surged. Royal Dutch Shell PLC on Thursday posted its highest quarterly profit since 2013, when oil prices were peaking above $100 a barrel. In addition, earnings jumped by more than half at ConocoPhillips and Schlumberger Ltd., where officials noted that drilling activity picked up in the second half of the quarter as prices stayed above $60.

Exxon Mobil Corp. and Chevron Corp. are expected to post similar gains when they report Friday.

Consumers are seeing the effects at the gas pump, where the average price of $2.80 is the highest since June 2015. The U.S. Energy Information Administration has estimated that the average household will spend about $190 more on fuel in 2018 compared with 2017—a 9% increase.

Executives at both 3M and Caterpillar Inc. said this week that they would raise prices to offset the hit to profits from rising commodity prices.

“We are seeing some increases in raw material prices, in fact, more than what we originally estimated,” 3M Chief Financial Officer Nicholas Gangestad said, adding that the maker of Scotch tape and Post-it Notes faced higher transportation and material costs as oil prices rose.

As was the case for Union Pacific, rising oil prices were at the same time a positive for Caterpillar, which provides the pumps for shale-well drilling and extraction. Caterpillar said sales of its equipment and parts used in the oil and gas industries rose 50% from the prior year to $1.2 billion in the first quarter.

“At the end of the day, higher commodity costs benefit many of our customers. and they are one of the reasons we have seen several of our end markets begin to recover,” Caterpillar Chief Financial Officer Brad Halverson said.

One factor that can blunt the impact of rapid oil-related cost inflation is hedging, or locking in future prices, which is common for airlines and other sectors where fuel costs can weigh heavily on the bottom line.

Gary Kelly, chief executive of Southwest Airlines Co., was more sanguine than American’s Mr. Parker about the impact of the recent rise, in part because the largest carrier of domestic passengers has a longstanding hedging program.

“I think we’re very well positioned to manage our way through a real fuel price shock,” he said. “What we have now is not an issue. If we get to 100-plus dollars a barrel, then I think we have something else to talk about.”


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