The recent collapse in crude oil prices makes me think about all the impacts this could have on businesses. Have you given sufficient thought to this? Here are some areas you may want to think about.
Of course the reduction in oil prices leads to reductions in prices of some of your raw materials. However you may also want to think about whether the change leads to any more fundamental changes in the relative value of certain feedstocks versus others. The higher the petroleum and energy content of your feedstock, the more it should reverberate with the drop in oil prices. You may want to engage with your suppliers in a deeper discussion of how crude oil costs affect their products. You should give special consideration to your utilities contracts, and any processing contracts where energy may be a very significant factor.
Perhaps you have allocated some of your investment portfolio to energy-savings projects. It is time to take another look at the economics of these projects as the incentives will be significantly lower and the returns not as robust. Of course we know by now that it is impossible to predict the price of oil; however consider that the International Energy Agency forecast is calling for oil to average $58 per barrel this year and $75 per barrel in 2016. It would be wise to test your project economics to a wider range of energy prices than perhaps you did when approving them in the first place.
It may also be a good time to consider your transportation needs. While all rates have likely decreased, they may not have decreased commensurately, and decisions you have made in the past on transportation may need to be tested.
It is worth thinking about what the impact of lower gasoline prices will be on demand and miles driven. Typically, lower gasoline prices do provide some stimulation to demand, especially in the U.S. market, and as the spring approaches it may be wise to consider your companys capability to ramp up production if needed.
If you are a player in the global market it is clear that lower oil prices and the geopolitical situation in todays world will lead to relative winners and losers. Oil-producing nations like Russia and Venezuela are being seriously jarred by the drop in prices while oil consumers such as China and Japan will benefit. How this impacts your global marketing strategy may be worth consideration.
It is inevitable that the slumping crude oil prices will lead to reductions in capital investments by the oil industry over the next five years. This may lead to opportunities for others; for example the availability of project labor may be higher, and there may be more competition in bidding for the projects that are still proceeding.
Also be aware that there may come available in the labor market some good project or engineering resources for your company to consider hiring.
What about your marketing plans for the next few years? It may be that consumers are less enthused about fuel-economy claims. You may want to consider differentiating your products in other ways. Perhaps consumers will be receptive to higher-quality oils, having saved money on fuel costs. You should also think about whether the lower oil prices will result in changes in your customer base due to potential consolidation in the industry. Certainly you need to watch the market closely as you consider and implement price concessions. If you havent done so already, it is timely to recast your financial plan at least for 2015 if not for the next three years.
Perhaps at this point you are thinking that it doesnt make sense to rethink all of these areas since oil prices are likely to rebound. While this is certainly a possible scenario (and perhaps at $45/barrel there is likely to be greater upside than downside potential), I suggest that the degree of change in the oil market demands some response. I suggest you evaluate the areas mentioned and pick a few in which to focus your response, such as an area of large risk or most significant short-term reward.
One point on which I think most readers would agree is that oil prices over the next few years are likely to be more volatile and unpredictable than ever. It is worth pondering what kind of projects and focus will be most beneficial in such an economic environment. Here are some suggestions:
Focus externally on customer satisfaction. It is worth staying even closer to your customers to ensure that in times of economic uncertainty they are not considering switching suppliers.
Focus externally on ensuring that your procurement activity is securing the right level and timing of price reductions, including not only raw materials but also transportation, utilities and services.
Focus internally on cost-reduction projects, especially those which reduce costs sustainably over a long period and which are not reliant on high energy prices to justify.
Focus on development of new products and capabilities addressing unmet market needs. Stay the course on long-term research areas where the impact will be felt in five to 10 years.
I hope some of these suggestions may be useful in these rapidly changing economic times!
Sara Lefcourt of Lefcourt Consulting LLC specializes in helping companies to improve profits, reduce risk and step up their operations. Her experience includes many years in marketing, sales and procurement, first for Exxon and then at Infineum, where she was vice president, supply. E-mail her at email@example.com or phone (908) 400-5210.