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Wednesday, April 1, 2009

The Fuel Economy: How low prices now could lead to higher prices later

Last summer, sweet crude peaked at $147 per barrel… and the memory of near $5/gallon gas is all too fresh in our minds. One might say that consumers are currently enjoying a “fuel dividend” right now, with gasoline expenditures now at between two and three dollars lower than we paid last year.

Different families are using that dividend in different ways. One couple that we’re acquainted with recently decided to go ahead with a new living room furniture set… citing the fact that they had put that the purchase off last summer when gas was so high. Now that prices are closer to $2/gallon, they felt they could afford it. For other folks, the lower cost energy has come just in time to help manage a reduction in income, related to a layoff or cutback in hours.

But for some time now, experts have been warning of a “second wave” of high energy costs, caused, in a way, by the fact that oil prices have fallen too far. Oil company income has fallen, so oil companies have cut-back their efforts related to research and development. Essentially, they’ve stopped looking for new sources of oil, because the world demand does not support pursuing new supplies. When the economy begins to recover, and the demand for oil rises quickly, those same oil companies will return to the shortage-side of the cycle; prices will skyrocket in the future for the same supply-and-demand reasons that have kept prices low right now. To understand this issue in greater detail, I offer these links to a story found in Newsweek last November, a more recent story in the New York Times which cites the McKinsey Global Institute study on the matter, or a story that appeared last week on CNBC.

Implications: First, if you have an energy-efficient product offering, and you're frustrated that it had traction while energy prices are down... stay tuned. Another window of opportunity is probabaly on the way. But for the rest of us, perhaps a there is a more important message here...

“Waiting out the recession” is not a viable strategy. A lot of smart people with a wide variety of experience have suggested that the road forward will present different challenges than the one that has brought us this far. As we’ve cited at this blog, Carl Steidtmann of Deloitte Research makes a great case for the de-leveraging of the consumer, and Lee Scott, former CEO of Wal-Mart suggests that some of the changes in consumer behavior could last a while. And as if the challenges we’re aware of weren’t enough, there are almost certainly new challenges to come. (Case in point: The possibility of a “second shock” of high oil prices.)

It is not my goal to cause worry. I’m just a big fan of facing reality. And the reality is this: If you’re waiting for a return of the good-old days when sales growth seemed to be set on auto-pilot… you might be waiting a while. Those companies who are embracing today’s realities, focusing on how to survive and even thrive, and figuring out how to play the hand they’ve been dealt… will do much better than those who take an ostrich-approach.

Consider, also, how you can apply the oil company challenge to your own business. Have you ended all Research & Development? Are you thinking about what the consumer might want next? Have your expense cuts reduced your ability to render service? When the consumer’s demand does increase—and it will—will you still be in a position to satisfy it? As I’ve said before, it takes one set of skills to survive a recession. It takes another set of skills to survive a recovery.

Mike Anderson

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