It's no surprise that energy prices are constantly on a rollercoaster. As Americans we've become accustomed to constant swings in our costs, but rarely do we stop and think about the impact it has on our industry. In textile rental services, we tend to focus on the fuel prices for delivery and forget about other important factors such as natural gas, electricity and the pricing cost of petroleum-based products. Hopefully, your textile rental service company is constantly analyzing the impact that all energy costs have on your bottom line and that you know how to properly pass those costs on to your customers.
Three questions:
• Do you currently measure and trend your energy costs?
• Have you tied these metrics and trends to your energy-related revenue?
• What are you doing to prevent future swings from affecting your margins?
Short-Term Oil Forecasts
With the amount of driving our service teams do every day, it's no wonder that oil prices have a major impact. According to JP Morgan's Short Term Oil Forecasts, the Greek economic crisis that prompted the rapid strengthening of the dollar over the past few weeks has triggered a slump in oil prices. At the same time, a steeper than normal increase in crude oil inventories and seasonally weak demand has also led to the decrease in prices. Experts expect these prices to increase but debate over whether that will happen in August or later in fourth quarter.
Gulf Coast Oil Spill Impact
The BP Gulf Coast oil spill continues to dominate the headlines as the worst oil spill in US history. We are just starting to scratch the surface of understanding the environmental impact of both the oil spill itself and the large-scale use of the chemical dispersant Corexit. There is debate as to how much oil seeped into the gulf during that time. Current estimates range from 420 million to 840 million gallons (10-20 million barrels) leaked since the April 20th explosion aboard the Deepwater Horizon drilling platform. The larger figure would make this spill nearly twenty-eight (28) times the size of the 1989 Exxon Valdez disaster!
In the short term, the Energy Information Administration does not assume any significant disruptions to energy supply due to the spill. They state, “the current relatively high level of on-shore crude oil and product stocks and the availability of the Strategic Petroleum Reserve can buffer the impact of any short-term crude oil supply disruptions. To date, however, there has been no impact on energy transportation and only very small impacts on production.” Along with the environmental impact, the long-term price effects of the lost oil are yet to be determined.
Long-Term Oil Forecasts
Over the last two years, crude oil prices have ranged from between $36.51 and $145.29 a barrel – a substantial difference. Due to the wide swing, experts have a difficult time estimating where prices will go from here. For this reason, experts such as the US Energy Information Administration (EIA) and the world's largest physical commodity future exchange, the New York Mercantile Exchange (NYMEX) predict only slight gradual increases over the next eighteen months.
What is interesting is that the predictions are relatively flat but yet, to get to a 95% confidence interval on these statistics, you have to broaden the range of possibilities from $42/barrel to $180/barrel. This dramatic swing proves that volatility is expected and even the experts are afraid to forecast too specifically.
Gasoline Forecasts
Over the last three years, we've seen a wide spread in gas prices – from $1.60 to $4.11 per gallon in national averages. In some states, the averages were even higher – up to $4.70 a gallon in California. For 2011, the EIA forecasts an average of $2.98.
Natural Gas & Electricity
Our industry is very dependent on natural gas. Our production facilities require this natural resource in the operation of boilers, dryers, ironers, presses, tunnels and sometimes even building and office heating. In 2008, the US industrial average natural gas price per thousand cubic feet was $9.67. Last year, that price was $5.27. This seemingly small $4.40 difference represents an 83% difference over the course of just one year.
According to a recent Bloomburg survey, gas may climb 27% from first quarter, extending a 19% gain in the three months through June 30 th . The recent heat wave across the country and anticipated busy hurricane season are driving up gas futures.
Compared to oil, gasoline and natural gas, electricity is considered to be the most stable energy resource from a pricing standpoint, primarily because it is so highly regulated. Small but steady increases are forecasted currently but ‘Cap and Trade' type legislation could have a dramatic effect on electricity prices.
Industry Implications Based on Energy Forecasts
As independent and regional textile rental service companies, the impact of energy price fluctuations can be severe. In addition to reviewing your plant's energy efficiency, be sure to continually evaluate how you bill your customers to compensate for the rampant energy pricing volatility that your company faces.
