Ironically, as hostilities became inevitable, energy prices tumbled, as the benchmark price for West Texas Intermediate crude fell from a peak of $37.83 per barrel on March 12 to below $29 in about a week, says Bruce Cavella, oil analyst with the forecasting firm Global Insights, Lexington, Mass. That is only about $2 more than last December's price, he notes.

"OPEC for months has been saying it would make up any shortfall in oil production caused by a war, and the administration issued statements that the strategic oil reserves would be tapped if necessary, but apparently no one was listening," says Cavella. "All of a sudden, those statements have grabbed some headlines and traders now believe that things are not going to be as tight as they once thought," he says. Prices also got a break as crude finally started to flow out of Venezuela after having production shut down for three and half months by a bitter labor strike, he adds.

While war always carries a high degree of uncertainty, Cavella expects oil prices to hover around $30 "for a few months" until domestic producers restore inventories, which are currently at historic lows. However, Cavella predicts that West Texas Intermediate prices will drop back to $26 a barrel by the end of summer.

In the meantime, higher energy costs rippled through the construction industry during the first quarter, causing price spikes for paving asphalt (see p. 34), plastic pipe products, material deliveries and the cost of running equipment fleets (see p. 35). But these inflationary spikes were contained to specific energy-sensitive sectors as growing competition, resulting from the downturn in commercial construction, squashed inflation in most other areas (see p. 38).

The surge in oil prices has caused collateral damage in the highway market as higher asphalt prices squeeze already tight state transportation budgets a little harder. Eric Meale, economic analysis manager for the Washington State Dept. of Transportation, says the dampening effect of rising fuel prices, which causes motorists to cut back travel, will likely reduce the state's overall $300-million highway construction budget by about 3%.

Click here to view data - Construction Material Price Movement in 2002-03

Click here to view data - ENR's Material Price Index (1981-2003)

Another example is Iowa, where the highway reauthorization package calls for 600,000 tons of asphalt work to be let between now and the first of July, says Dave Carlson, president of Decorah, Iowa-based Fred Carlson Co. But "that's not going to happen," he says. "I think the DOT is waiting for asphalt prices to come back down, hoping it will get more bang for the buck when it does. That's smart, but it's hell on contractors."

The surge in oil prices translated into a 10% increase in ENR's 20-city average price for liquid asphalt during the first quarter. And ENR's statistics may have more price increases to absorb. Atlanta-based APAC Inc., one of the nation's largest asphalt paving companies, reports that liquid asphalt prices have jumped 27% since the beginning of the year to between $185 and $215 per ton. "It is still winter for us, and our full demand has not kicked in yet, but prices already are higher than last year's peak," says Charles Potts, APAC president.

Perhaps a greater concern than price is the supply disruption caused by the lingering strike in Venezuela, says Mike Acott, president of the National Asphalt Paving Association, Lanham, Md. "The biggest concern of our members along the eastern seaboard has been the availability of asphalt product from Venezuela, which produces excellent asphalt and exports a significant quantity to that market," he says.

APAC had to scramble to find alternate sources to Venezuela, which was the firm's main supplier, says Potts. "We have been able to cover most of our supply needs from other sources but we also have been fortunate because the weather [in the southeast] has been so wet that we couldn't work," he says. "If the weather had been good, we would have been out of asphalt in a lot of places."

Florida is the only market in which APAC experienced supply disruption, which in some cases led to allocations, says Potts. He is concerned that suppliers have not been able to fill inventory this winter, as they normally do before going into the paving season. APAC is bracing itself for what might be a tight spring market by leasing additional storage tanks in order to build its own inventory.

Polyvinylchloride, as well as polyethylene resin prices, have risen "dramatically" since January, driving pipe prices upward by more than 20%. And the situation is likely to get worse before it gets better, says Larry Fleming, president of Pacific Western Extruded Plastic Co., Eugene, Ore., the West Coast's largest producer of PVC pipe.

Plastic pipe products are being punched by near-record-high natural gas prices that impact the natural raw materials of PVC pipe resin, ethylene and chloride. Most producers use natural gas to drive the cogeneration plants used to create chloride, while ethylene is derived from natural gas.

Natural gas futures prices may have peaked "a few weeks ago, but world events make any forecast difficult," says Fleming. The price was in the $2.50-per-million-BTU range most of last year, although spot prices recently approached a peak of $12. "Now, futures are in the $6 to $7 range and I expect that they will flatten to around $5, which is still double what it was a year ago," he says.

"There was no way we could pass on the peak March prices; we ate most of that," says Martin White, vice president of Dallas-based PVC resin producer OxyVinyls. "Customers ask why resin prices are not falling with natural gas prices but the fact is we never raised our prices" to meet peak natural gas price levels, he adds.

"We also are seeing pending shortages of polyvinyl chloride and vinyl chloride monomer, and there is not much capacity in the industry," says Fleming. PVC manufacturers are running at capacity, and the result is both cost and demand pressure on PVC prices. Spot shortages, especially of water and irrigation pipe, already are beginning to stretch delivery schedules, and electrical products may not be far behind, he adds.

"It wasn't that bad until the last few months," says Steve Swatek, chief estimator for Garney Companies Inc., Kansas City. "Now, we are having a hard time getting price guarantees beyond 30 days." He fears that contractors may be forced to eat price increases on jobs where awards are uncertain. "We are starting to see prices climb to unheard of levels," says Swatek. "We recently got a bid on 36-in. force mains at $85 per ft, which is outrageous. That pipe usually goes in the $50 to $55 range."

Although PVC and ductile iron pipe are only occasionally in direct competition, ductile iron manufacturers say that rapidly rising PVC prices have them eyeing the water and wastewater market landscape for opportunities. "We track resin and PVC prices pretty closely," says Mark Wooten, director of corporate marketing for Birmingham-based U.S. Pipe and Foundry. "We think those prices are starting to get to a point where we may have some opportunities."

Class 50 ductile iron "could not have competed six months ago with 12-in. PVC C-900 DR 18, but they are starting to come very close," says Swatek. "Where 16-in. ductile iron could not ever compete with PVC six months ago, today it can." Wooten adds that "it will be two to three more months before these prices peak, and I don't think they'll be coming down until the end of the year."

Rampant price discounting in the structural steel market during the second half of last year finally made its way into published list prices and into ENR's index. In February, ENR's 20-city average price for structural steel dropped 2.6%, led by a 4.2% decline in prices for wide-flange structural beams.

The rollback dropped the average price 5.1% below a year ago, including year-to-year declines of 7.9% for wide-flanges, 4.1% for I-beams and 2.2% for channel beams. Lower steel prices pulled down the materials component of ENR's March cost indexes by 1%, reducing the annual inflation rate tracked by ENR's Building Cost Index from 2 to 1.5%.

At the beginning of the year, structural steel producers announced reductions in their published price lists that recognized across-the-board price erosion that had taken place, says Jim Wroble, marketing manager for the structural and rail division of Steel Dynamics Inc., Columbia City, Ind. "There has been so much going on in the pricing of structurals in the last six months that it is hard to quantify with a single number, except to say that the trend has been generally down."

Last year, domestic mills started offering to match cheap import prices for several customers, says Wroble. "Now you are seeing a lot of cheaper tonnage hit the market," he says.

Click below to read more from First Quarterly Cost Report >>

Asphalt: Oil prices hammer asphalt paving costs

Equipment: High fuel prices squeeze operating costs

Labor: Laborers' union cracks into Florida concrete market

Indexes: Commercial building downturn crushes costs

Methodology: Analyzing inflation's split personality

ne of the first victories in the Iraq War came on the economic home front. A speculative bubble that pushed prices for oil and natural gas to near-record levels during the first quarter finally burst.