What does the fall in oil price mean for operations?

On the news this morning it was reported that British manufacturers and service firms were sitting on piles of cash generated by record profits in the last year – due apparently to the falling price of oil, and hence energy.  At the same time, the Prime Minister was saying that they should pass on this bonanza to their employees in the form of wage rises.  All silly nonsense – of which there will be plenty between now and the UK general election.

But this got me thinking about what the lower price for oil really means for operators.  The answer (of course) is that it depends on what sector of the economy you are talking about.  There are some sectors where the cost of energy, or fuel, is a high proportion of operating cost.  Airlines are a good example.  But firms with such a cost structure generally buy their supplies in advance.  They hedge their purchasing in order to ensure some certainty about their costs in the future.  For instance, Easyjet had purchased 80% of its fuel for 2015 and 50% of its fuel for 2016 before the most recent steep falls in the oil price (BBC Business News).  So prices are not going to fall deeply (and/or profits rise steeply) in these sectors until all their energy/fuel supplies are purchased at the new low price.

But there are many, many operations in which energy is less than 5% of operating cost.  And since energy suppliers themselves are not yet passing on lower prices in full to their customers, these operators too are not going to drop their prices significantly in the near future.   And even when they do, the drop will be marginal.   Besides which, there are many other forces, other than the cost of oil, that drive price competition – as we are seeing in the supermarket sector right now.

From  the consumers point of view, the most immediate and most significant effect will be the drop in price of petrol at the pumps.  And this in turn may benefit operators, as consumer demand may rise on the back of this feel good factor.

This entry was posted in Chap 01 Introduction, Sector: Energy & Utilities. Bookmark the permalink.

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