Market Perspective

What Spiking Oil Prices Mean For Your Business

November 23, 2021
The C2FO Team

The effects of rising oil and energy prices are expensive, inconvenient and nearly inescapable.

You’re likely feeling the pinch of spiking oil and energy prices whether you own or don’t own a vehicle, eat at restaurants or at home, or are an employee or an employer. 

The energy component of the November 2021 Consumer Price Index (CPI) is profound, up 30% for the 12 months ended October 2021 amid the CPI’s all-item 6.2% increase — itself a 30-year high for the same period. 

For perspective, fuel oil and gasoline price increases of roughly 50% each far exceeded the nearly 5% all-item inflation rates of recent months, which were already unusually high and considered to be temporary.

Oil pricing

Historically, oil prices regularly rise and fall — but have risen over time — with lows and highs often influenced by worldwide events. The 75-year low of less than $18 per barrel occurred in March 1946, following the end of World War II in September 1945. The high of nearly $179 per barrel occurred in June 2008 amidst a global financial crisis. 

More recently, November 2021 prices of $82 per barrel are:

  • Up 50% from $55 in January 2020

  • Up 300% from $20.16 in April 2020 

  • Up 71% from $47.79 in November 2020

Like many items, oil prices are a function of supply and demand. For example, scarce or limited availability of concert or event tickets force seat prices higher. Similarly, gasoline prices are elevated when oil production is low and demand is high. As national holidays approach, watch how TV stations and networks report on rising pump prices resulting from anticipated holiday travel, with AAA seasonal studies often cited.

How oil is used

Even without travel spikes, routine oil consumption is consistently high. Consider: 

  • US daily oil consumption has risen and fallen during the short term, but risen over the long term. Usage has grown from about 11.5 million barrels in 1965 to nearly 17.7 million barrels in December 2020, an increase of 49%. Even higher consumption of 20.5 million and 19.5 million barrels was recorded in 2005 and 2019, respectively. 

  • Oil and its byproducts are prevalent in the products we use daily. Examples include: 

    • Fuel for transportation, heating and electricity. 

    • Plastics used to manufacture electronics, furniture, packaging, building materials and medical supplies. 

    • Spandex, polyester and nylon that make clothing durable and long-lasting.

    • Toiletries, including soap, lotion, toothpaste, shaving cream, shampoo and deodorant.

It’s not just gas and oil

Prices for propane, the primary source for heat in nearly 5% of US homes, are also up sharply this year. According to the US Energy Information Administration, “households that use propane as their primary source of heating fuel will spend 54% more on average for heating this winter compared with last winter, mainly as a result of higher propane prices.” 

Consumption is highest in New England, especially in Maine, where more than 12% of homes are heated with propane, according to a recent Wall Street Journal article, and the Upper Midwest. As of early October 2021, the $2.59 average price per US gallon reached a 10-year high for that point in the annual heating season. 

Consumer and producer prices for virtually all forms of energy except electric power are tracking at least 40% higher in October 2021 versus a year ago. On the extreme high side, intermediate demand producer prices for liquified petroleum gas (LPG — propane and/or butane), jet fuel and diesel fuel have all more than doubled in price versus a year ago and are up roughly 12%-14% versus a month ago as the US and global economies continue to recover.

The effect on manufacturers

When preparing or reviewing your income statement, you likely see the effect on manufacturers in the cost of goods sold (COGS). Higher prices from suppliers for components made of resins or other materials can compress margins. Scarce availability of computer chips for cars and electronics will have a similar ripple effect. Though maybe tolerable for a month or two, extended periods typically result in makers’ price increases or cost-control measures. 

According to C2FO Director of Client Insights Anne Jones, makers of consumer packaged goods (CPGs) are getting hit especially hard. “They were hit by initial COVID production interruptions, and now by input, front-line labor, transportation and logistics, gas pricing and packaging issues. They must balance price increases to meet retailer margins and fund innovation to drive growth while their operating environment is still extremely challenging.” 

For some manufacturers, rising energy prices reinforce the importance and urgency of innovation to create long-term business models that are less sensitive to energy markets. For example, automakers Ford, GM and Stellantis jointly announced in August that electric vehicles will comprise 40%-50% of their sales by 2030. 

Though not a manufacturer, carrier UPS reported that third quarter 2021 results exceeded third quarter 2020’s in part due to a strategy of efficiency over package volume, which was down when customers returned to in-store shopping. 

The effect on distributors

You likely see the effect on distributors not only in the higher prices you pay to manufacturers, thereby increasing your COGS, but also in transportation-related expenses — and maybe in more than one place. 

  • Inbound freight costs rise when carriers pass along the higher costs of fuel, labor or vehicle maintenance.

  • Forklifts running on propane become more expensive to operate. 

  • If you sell items with “free” delivery, you may need to adjust order thresholds to maintain that incentive. 

  • If you have a discount arrangement with a carrier — and whether you charge customers for shipping or absorb it — that carrier may impose rate changes that increase your costs or decrease the margins on customers’ reimbursements.

  • A possibility is suspending or discontinuing shipping of orders that customers can pick up or arrange delivery themselves.

The effect on retailers

Often customer-facing, retailers are impacted not only by higher prices for goods and shipping but also by the frustration of serving customers amid labor and supply chain issues. 

Inventory may need to be ordered sooner or in larger quantities to achieve a quantity of scale. Deliveries of restaurant-prepared meals, flowers or groceries may be suspended or assessed charges that test customers’ loyalty. All the more challenging for retailers is that pass-along price hikes often occur at inopportune times, like the upcoming holidays, when consumers would rather spend more on niceties than necessities — like gasoline. 

A recent Boston Globe article stated that popular ride-share and food delivery services are not increasing drivers’ compensation as fuel prices rise. Consequently, retailers’ ability to provide their services may suffer when availability of “last-mile” services are reduced or slowed. 

The effect on employers

Rising energy prices impact employers in other ways, too, namely through their employees. Even professional service providers like law, accounting and digital marketing firms that don’t traditionally manufacture or distribute goods are affected. 

  • Associates may seek cost-of-living wage adjustments as they incur higher food or housing expenses. 

  • Employees may seek work elsewhere, given a transitioning workplace featuring worker mobility, transience and historic quit rates known as the Great Resignation. 

  • Higher commuting costs may have associates seeking more work from home or hybrid arrangements — just when many workplaces are returning to in-person, hoping to benefit company culture, creativity or collaboration. 

In conclusion

You may not think that the price or availability of just one item could have such a substantial and widespread economic effect. But the universality of oil and its byproducts as the means to travel from one place to another, or to function as we’ve become accustomed make oil not only desired but essential. Until oil availability increases through boosted production or the release of global reserves announced recently by the White House, consumers and businesses will continue to battle the far-reaching effects of untimely and stubbornly high oil prices. 

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