One of the world’s biggest chemical companies believes that oil prices will remain at record highs and that old-fashioned means of hedging against higher energy costs are now useless.

Dow Chemical, the huge Michigan company that makes solvents, paints, agricultural feeds and plastic, said this week that for the first time it had increased prices to all its customers globally by as much as 20 per cent.

Some of the company’s biggest customers are companies such as Unilever, the Dove soap producer; Procter & Gamble, which makes Pampers nappies; and Kimberly-Clark, the lavatory-roll manufacturer.

Dow has been hit on two fronts by the soaring cost of oil and gas because it uses natural gas as a raw material, which it breaks down. It also consumes huge quantities of energy to run its processes.

Andrew Liveris, Dow chairman and chief executive, said that the sweeping price increases were “essential to mitigate the extraordinary rise in energy and related raw material costs”.

He added: “Our first-quarter feed-stock and energy bill leapt a staggering 42 per cent year over year, and that trajectory has continued, with the cost of oil and natural gas climbing ever higher. 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 spent $8 billion (£4 billion) on energy and hydrocarbon-based feed-stock in 2002. At the current rate, that would climb to $32 billion this year.

Dow’s price rises are expected to feed through to the cost of ordinary household products as diverse as car wax, nappies, paint, drycleaning bills, stockings, paper and packaging.

In the US, the cost of living rose by 3.9 per cent in April, including the price of food and fuel. Economists such as Ian Shepherdson at High Frequency Economics, expect that rate to peak at 4.4 per cent by the year end.

A spokesman for Dow Chemical, which derives about 70 per cent of its sales from outside the US, said: “You can only hedge so much. The cost of hedging for oil at $130 a barrel is hugely expensive.”

He added: “We used to raise prices according to each industry and geographical region, we would look at the costs and test the market. We can’t do that anymore. The price of oil is not a short-term problem. It is not going away. We have to face up to the fact that we are living in a new environment of higher oil and gas prices.”

Shares in Dow Chemical, which are traded in New York, were almost unchanged at the close yesterday at $40.76.

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