Killer Crude

Written by Claire Gagné

Much like those hourly price swings at the gas pumps, there’s little rhyme or reason to entrepreneurial Canada’s reaction to skyrocketing oil prices. High energy costs were a concern for almost 80% of small-business owners surveyed by the Canadian Federation of Independent Business in June — back when a barrel of West Texas tea could be had for as little as US$53. But barely half of respondents to a poll in late August — when oil topped US$69 a barrel-believed such prices would significantly hurt their bottom line.

Perhaps the optimists operate in oil and gas production, for which profits are up 76% over the past six quarters. However, rising petroleum costs are the primary reason why chemical, plastic and rubber manufacturers — for which oil is a primary input — saw their profits drop by 20% last quarter. Transportation companies, from couriers to airlines, have witnessed a sharp spike in costs. And as oil goes, so goes the loonie, pinching the profits of tens of thousands of exporters who price their goods in U.S. dollars.

Although many firms have yet to feel the brunt of surging oil prices, experts believe they will eventually — and should start preparing for it now. “Our sense is that it is early days,” says Eric Andrew, a partner at PricewaterhouseCoopers in Vancouver. “People are maybe thinking that this is something that’s going to go away. Now is the time to take the steps to make sure you’re protected, in case it isn’t.”

The trouble is that there’s little elasticity in energy costs. “You don’t have much flexibility,” says Benjamin Tal, senior economist at Toronto-based CIBC World Markets, which predicts an average oil price of US$84 a barrel in 2006. “You still have to go see your clients. You still have to use your machinery.” Passing higher costs along to your customers is another unlikely option, particularly for firms in highly competitive, price-sensitive markets, such as consumer electronics.

To protect your profits in the short term, you’ll have to rein in non-energy costs, such as payroll and capital improvements. To maximize long-term savings, consider your energy-proofing options now. Andrew cites the examples of some forward-thinking PwC clients, including a company that developed a starch-based wrap to replace its oil-based plastic wrap, a firm that redesigned shipping containers to squeeze more product into a single load, and one business that offers financial incentives to employees who purchase a hybrid gas/electric vehicle, saving on the employee fuel costs it covers.

Although investments in alternative-energy sources and machinery are economically unsound for most companies today, they soon may offer the only way to survive a 21st-century energy crisis. “The real story about oil prices is not that they are elevated now,” says Tal. “The real story is that they will be elevated 12 months from now.”

© 2005 Claire Gagné

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