This past fall brought two key changes in the energy sector that will have both positive and negative impacts on businesses in the U.S.:
- Election of a president who supports a focus on petroleum and other fossil fuel energy sources
- An agreement by OPEC members, as well as non-OPEC countries like Russia, to cut production of crude oil by 2 billion barrels per day
The latter factor has contributed to an almost doubling of crude prices since January of last year.
Because both energy and raw materials are derived from petroleum, surging prices of crude can have substantive direct and indirect effects on the cost of operations of companies. Therefore, it’s a good time to assess and adapt business strategies to the current geopolitical and economic climate.
OPEC’s move and the resulting increases in price per barrel of crude directly benefit U.S. companies involved in drilling and extraction of crude. In the past, much of U.S. production was only profitable above $50 per barrel, an issue that is particularly crucial for smaller companies focusing on supplies that are more difficult to extract. Higher prices also benefit companies peripherally associated with crude production, including equipment and support industries.
In contrast, surging prices for energy and raw materials present challenges for other business sectors. Increasing costs of manufacturing, as well as transportation of finished goods, may strain finances for a wide range of industries in sectors that include agriculture, food and beverages, plastics, personal and household care products, and pharmaceuticals.
Due to market pressures, only a portion of those increased costs on goods and services may be passed along to consumers through higher prices or fuel surcharges, a strategy widely used several years ago when crude prices soared to triple digits per barrel.
Additionally, higher household energy and transportation costs reduce available income for consumers, which can affect sales. Naturally, if consumers are forced to pay more for œessentials, they have less available for general spending.
According to a 2015 analysis by JPMorgan Chase of their customers’ buying habits, consumers most impacted by energy costs were lower-income and younger Americans. However, because recent increases in crude prices have not reached the magnitude seen eight years ago, when prices per barrel topped $100, adaptations to current events may likely be more subtle.
Beyond OPEC’s influence on crude prices is the issue of how businesses choose to address climate change. It’s probable that there will be significant opposition in the U.S. and abroad to a shift away from increasing investment in low- or no-carbon energy sources.
And businesses will likely continue to move forward on assessment of carbon footprints for their products and operations, particularly as this aspect will still be relevant for international sales and operations, as well as in response to consumer pressure in the U.S. It’s remains unclear the extent to which this factor impacts production and combustion of oil and gas resources in the near future.
With the level of volatility the oil industry has been experiencing, this week’s Americas Crude Summit in Houston is certainly timely. We’ll of course be in attendance and look forward to lively discussions on how current events will impact strategic planning within the business community.