Not so long ago (fall 2014), oil was trading at more than $100 a barrel. Now, just 15 months later, it’s practically being given away. (As of the writing of this article in late January, March 2016 crude oil futures were at $30.15, but who knows what the price will be when you read this?) In the summer of 2014, shale oil producers and frackers were dreaming of ever-larger projects buoyed by a stable, secure price that made high-cost production methods economically feasible. In January 2016, those projects, and a lot of others, have been scrapped as these same companies openly wonder if they’ll still be in business by year-end, or even the next quarter.
Sounds grim, doesn’t it? Well, that all depends on your line of business. If you’re in the oil & gas industry or one of its related sectors, you’ve probably already updated your resume. If you do business in an oil-centric part of the country (like West Texas), you’ve undoubtedly felt some negative impact on your bottom line. However, if your company isn’t tied to the oil industry by either business or geography, you’re no doubt scratching your head and wondering what all the fuss is.
For you, lower oil prices mean lower shipping costs, lower overhead for utilities, equipment and supplies, and less pressure on your budget and profit margins. Plus, as your customers are also paying less for energy, they have more money to spend with you, offering the perfect business scenario of lower costs and higher sales. So it’s perfectly understandable some small business owners might be doing a few cartwheels, Bronx cheers or shedding crocodile tears for petroleum producers. “Hey, it’s about time someone stuck it to those oil companies!”
Be careful what you ask for.
Yes, many small businesses are certainly enjoying how the shoe is now on the other foot after the price of oil first soared above the century mark in 2008. Many have had to make hard choices over the years thanks in no small part due to rising energy costs. Some have had to raise their prices to keep pace, or have had to pass their increased costs to customers, risking losing them in the process. So if ever-higher oil was bad for small businesses, how can ever-lower oil be anything but good?
It’s not an easy answer.
Put in basic terms, the economy is a lot like a food chain. When there is a disturbance in the chain, eventually the entire chain is affected. Lower energy prices are a boon right now for many businesses large and small. However, for those in the energy sector, the dramatic drop is decimating their businesses and their livelihoods. If the price of oil doesn’t hit a floor and allow the market to catch up, it will cause instability in the economy. We’re already seeing that instability in the cutting of oil & gas expenditures and jobs. That will have an eventual ripple effect that will someday start to impact businesses outside the energy sector.
For an overly simplistic example, oil companies will order less equipment. The companies that make the equipment will then start ordering fewer supplies and cut their workers. Those cuts might mean less need for something as mundane as laptop computers for the office or dress slacks for the workers – things you wouldn’t associate with the oil business. The people that make and sell those things now have to cutback and soon it spirals in all directions, affecting companies that have nothing to do with oil.
Falling oil prices are great… as long as the price eventually stabilizes, and enables businesses of all sizes to adjust to the new economic climate. We haven’t reached that point yet, according to the analysts, the forecasts and the daily headlines.
So, back to the beginning: Are plunging oil prices great for small businesses? For the moment, yes, they are. However, for the good of the overall economy, the market needs stability, whether at the low end (now) or the high end (as it was in 2008).