Gasoline prices of about $4 per gallon are fueling discontent at Central Indiana businesses.
High gasoline prices have a ripple effect throughout our economy. Airlines and trucking companies, for example, pay more for fuel and pass those costs along to customers. (Jet fuel prices have increased more than 50 percent in the past year.) The increased transportation costs for food affect restaurants’ bottom lines and the prices shoppers pay at the grocery—with an estimated 2.5 to 3.5 percent increase expected for the latter this summer.
If gasoline and oil prices rise because of a strong economy, most business people can anticipate that increase and factor it into their operating costs. Our economic recovery is relatively weak, however, and high fuel prices could threaten its progress.
In contrast to the strong economy scenario, local business owners couldn’t have predicted the current high price of gasoline and oil. It stems from disruptions of gasoline and oil supplies because of political and social turmoil in the Middle East and North Africa, home to 40 percent of the world’s oil production. Since protests began in Tunisia on January 14, 2011, unrest has spread to Egypt, Libya, Sudan, Yemen, Algeria and other countries.
Disruptions in oil and gasoline production and supplies drive up the price. By contrast, disruption of the consumption of gasoline and oil can have the opposite effect.
On March 11, for example, Japan suffered the devastating one-two punch of a massive, 9.0-magnitude earthquake combined with a deadly tsunami. Japan is a big importer of oil and gasoline. A weakened Japanese economy could result in less demand for oil and gasoline, increasing the amount available globally and decreasing the price.
As these examples indicate, these disruptions are wild cards for business owners when estimating gasoline prices. While you might have a fairly accurate idea of your healthcare costs in two to three years, it’s impossible to predict your gasoline prices will rise to X amount because the dictator of some oil-producing nation will be overthrown.
So how do you protect your bottom line against these gasoline and oil increases?
Reduce your company’s travel as a matter of policy. Reduce the number of business trips your employees take. Do more meetings over the phone or via teleconferencing. Economize on travel where you can now, since you have no idea where gas prices will be in four months, let alone four years.
You might ask: Couldn’t we just set aside a contingency fund in case gasoline and oil prices rise? Yes, you could. But the problem is predicting the range of increase.
When the Butler basketball team plays, for example, you might look at the opponent’s current win-loss record, as well as their past record against the Bulldogs, and correctly predict that Butler will win by five points.
But as the highly volatile turmoil in the Middle East and North Africa and the disasters in Japan demonstrate, there is no accurate way to predict world events—or how much they will increase oil and gasoline prices.
Lock in futures contracts for gasoline and oil. If your company is large and buys a lot of oil and gasoline, you can lock in prices with your suppliers. Admittedly these prices will be higher because of the current situation, but at least they will be stable.
Make your operations less energy-intensive and more sustainable. Most businesses would like to have an environmentally-friendly operation, if they can. The challenge is figuring out how to afford the major financial considerations involved while managing to stay in business. After all, your company can’t have a positive impact on the environment unless you’re still around.
That said, any steps—even tiny ones—you take toward reducing energy consumption will have long-term economic benefits. Less energy consumption is a great goal to drive toward.
Actually, with $4-a-gallon gas prices, let’s make it a goal to aim for.
Chuck Williams is dean of the College of Business at Butler University. William Rieber, Professor of Economics at the COB, contributed to this article. For more information on the College and its “real life, real business” approach to business education, visit www.ButlerRealBusiness.com or e-mail Chuck at email@example.com.
To search the archive of Perspectives articles, go to the Search page