Soaring oil prices set to shake up our business world

Peter Ladner
At Large
Business in Vancouver
August 9-15, 2005; issue 824

In case you hadn't heard, oil prices are likely to keep going up. Goldman Sachs is forecasting that oil prices will spike as high as US$105 a barrel by 2010. The chief economist of the International Monetary Fund (IMF) is predicting that China's thirst for petroleum, combined with supply pressures, will keep oil prices volatile for the next 25 years, including spikes up to $US100 a barrel. The rate of growth in oil demand last year was faster than it has been in 25 years. The IMF forecasts China's oil consumption in 2030 to match current U.S. consumption, which is about a quarter of the world's oil production.

And if supply and political pressures don't hike the cost of oil, carbon taxes will. Europe has already started to charge $64 per tonne of CO2 emitted until 2007, with higher penalties coming in 2008 if a company exceeds its greenhouse gas emissions allowance.

Many unpredictable factors could intervene to stop these hikes from happening, but there's also a chance that the fear premium, based on the unpredictable security of supply from corrupt, politically hostile countries, could speed up the arrival of $100-per-barrel oil.

At some price point, consumers and businesses will be forced to cut their consumption to allow soaring demand to line up with the much slower growth of supply. This is all background for the current port truckers' strike, a damaging, desperate reaction to a slight increase in fuel prices compared to what's coming. The truckers got caught in the price squeeze and are trying to force their way out of it. Their frustration is matched by taxi drivers in Vancouver City. They recently won a price increase based on higher fuel costs, but say it's still not enough to cover their unavoidable higher costs.

Fuel costs clearly make up a significant portion of a trucker's or taxi driver's variable costs, but higher fuel costs will find their way into all of our businesses and bottom lines.

How ready are you?

Vancouver sustainability strategist Rob Abbott recommends every business develop and incorporate alternative energy rules into all capital expenditures, with any expenditure on new energy sources being on "non-carbon" sources.

CIBC World Markets economist Jeff Rubin, one of the forecasters predicting that crude oil prices will double in the next five years, with $100 per barrel a possibility by 2010, points out that this isn't the 1970s. Then, workers tried to win wage increases to protect their purchasing power against the ravages of inflation driven by oil prices. "In today's world," writes Rubin, "where production and jobs can easily be shifted to low-wage economies, North American wages will have to eat energy price increases, and in the process, stomach the loss of purchasing power that comes along with it."

What will your industry have to stomach?

Think about the tourism industry. Virtually every tourist arrives here thanks to oil. More expensive oil means more expensive trips. Northwest and Delta Air Lines are expected to file for Chapter 11 bankruptcy protection in mid-September, citing the need to cut costs and adjust to record high fuel costs.

Should we be focusing on attracting tourists who don't have far to come? Will convention travel growth continue? Can buses and trains possibly replace cars for nearby rubber-tire traffic? Will a lot of tourists just stay home?

What will we eat in a $100-per-barrel oil world? The food industry is particularly vulnerable to oil shocks, with the average food product travelling 1,500 miles to our table. By one estimate, a quarter of all the travel by heavy goods vehicles is to carry food around. Exotic foods are bound to become more expensive as the increasing costs of transportation are factored into their prices. Protecting the agricultural land reserve so we can produce more food locally takes on a new urgency as all import costs rise. Meanwhile, local food exporters will be scrambling to stay competitive in export markets requiring high transportation costs to reach the marketplace.

Conversely, if you're in a business that can rescue oil-captive companies in times of rising prices, opportunity isn't just knocking, it's pounding on the door. The alternative energy business will be coming into a much more favourable financial zone.

Lighter materials (carbon fibre cars) and lighter loads (Ikea is looking at inflatable furniture) will show up on everyone's agenda.

Anyone who can source supplies, materials and customers close to home will have an advantage. Every business and consumer will feel the impact of oil prices as high as $100 a barrel.

Businesses that plan on being profitable in 2010 should be prepared for that possibility. With it comes a vastly different economic landscape.

Peter Ladner is a Vancouver city councillor and vice-president, Business in Vancouver Media Group, pladner@biv.com. His column appears weekly.