Higher oil price costs threaten business owners’ profits, sales and viability in the near term. However, we believe this provides further incentives for business owners to accelerate energy transition plans.
What do higher oil prices mean for business owners?
It increases direct and indirect input costs, impacting profit margins. Businesses and consumers who depend on oil will likely respond to higher prices by spending more on oil and less on non-oil goods and services. Businesses selling non-oil goods and services may therefore experience lower sales. And the broader rises in global energy prices can threaten not just electricity pricing, but also availability, particularly if smaller businesses are unable to secure competitive fixed contracts. This is a threat to business viability.
Opportunities for business owners
Where there is pricing power, small businesses are naturally responding to higher input costs (including higher oil) by raising their own selling prices. In the near term, many business owners will likely focus on cost reductions, cost pass-through where possible and preserving their financial resilience.
However, we suggest that higher oil prices encourage business owners to focus with additional fervor on their sustainability plans. There are opportunities for business owners to make strategic or operational changes that could have a commercial and environmental impact.
1. Intensify energy efficiency efforts. Business owners can offset the effects of higher oil prices by boosting energy efficiency — the amount of output per unit of energy. More output for fewer units of increasingly expensive fossil fuels (or the same production with fewer oil inputs) can help to offset the financial pressures of higher oil prices. We see the greatest near-term opportunities in more energy-efficient appliances, smart transportation and smart buildings (including manufacturing). Examples of more energy-efficient appliances could be as simple as replacing all incandescent lighting with LED bulbs or implementing power management systems that turn off computers or other equipment outside of working hours.
2. Investigate alternative fuel and energy sources, especially renewables. Today’s high oil prices may spur business owners into seeking alternative sources of energy. The most obvious way to reduce exposure to volatile and high-carbon-emitting oil prices is to seek a renewable electricity supplier for your operations. We note that the less expensive ways to produce electricity are existing nuclear power and hydrogen. While this may not necessarily lead to an immediate drop-off in costs — given higher overall demand and the need to use some forms of fossil fuels for energy production in down periods for renewables — we expect shifting to a renewable electricity supplier would deliver cost savings over the medium and long term.
3. Initiate collaboration and supply chain engagement to lower costs and carbon beyond your business. The costs of high oil prices are not just direct. They also feed through into the costs and ultimately prices of other firms across the supply chain. Similarly, the carbon footprint of oil cannot be tackled purely within one firm.
Encouraging suppliers to adopt energy efficiency measures or accelerate their shift to renewables not only reduces the input costs and the oil intensity of the value chain; it can also help to reduce overall carbon emissions, an increasingly important factor for entrepreneurs as Scope 3 greenhouse gas emissions become mandated by regulations like the Task Force on Climate-Related Disclosures.
Also, working with your customers and employees to lower oil usage (and sensitivity to high and volatile prices) can yield commercial and environmental benefits alike. Offering employees the flexibility to work from home — including flexibility to commute when traffic is below its peak — can save on commuting costs, time and emissions, and also alleviate cost-of-living squeezes from higher energy prices. Enumerating the cost savings of such measures can reinforce the value of a flexible working culture and potentially increase employee loyalty. And business owners looking to relocate premises could increasingly consider where to site themselves in order to minimize commute time for the labor force. Doing so not only reduces the impact of oil prices through transportation; it also contributes to lower Scope 3 emissions.