Energy Sector

Has Your Company a Plan?

It is anyone’s guess as to whether oil will cross $100 a barrel anytime soon, but no one connected with a stock market will dispute that the trend of runaway inflation in this strategic cost factor may not change in the foreseeable future either. Stock market pressures on short-term results can divert executive attention from crucial issues related to the impact of inflation in oil prices. Such effects may not always be dramatic and direct; key ancillary units may face the brunt of international oil cartel moves, and either disrupt supplies or ask for frequent and large purchase price increases. How are companies in which you have serious stock market investments affected, and do they have plans to counter threats from the global oil scenario?

Not all stock market members are affected in the same way, and their reactions vary as well. The airline industry hesitates to raise prices, and cannot get new fleets of fuel efficient aircraft overnight. There seems to be no alternative to sharp dips in profits for this industry, every time fuel prices climb.

Refineries, especially in India, are at the other end of the stock market spectrum with respect to oil inflation, because companies marketing their fractions are obliged to pick up everything that is produced at indexed mark ups. The stock market loves such refineries because they stand to gain as a matter of course every time crude prices rise!

Most companies listed on a stock market however, fall between the extremes of airlines and refineries with captive marketing arrangements. The automobile industry is a good example of innovation in the face of adversity. Hybrid engines, improved diesel engines, and small cars are concrete and tangible responses to the challenges of fuel price rises.

Healthcare companies need not worry about the price of oil, because their costs of production are relatively low, especially with products under patent. Demand is insensitive to price in life saving categories, and people at large are not aware of the enormous spread in prices between countries and tiers of the distribution chain.

What Happens to Your Stock Market Portfolio if Oil Crosses $100/Barrel?

Companies which produce generics with bulk are as vulnerable as airlines. Fertilizer companies are prime examples of the crushing effect of oil inflation, both on the cost of production, as well as on logistics. Most farm produce is affected in this manner as well. Governments may try to subsidize these trends, but they cannot reverse stock market impacts in this respect.

Check on the price sensitivities of demand of the products and services in which your companies are involved. Find out whether they have substitution and productivity improvement plans in place. Ask for sensitivity studies on projected earnings per unit of crude price inflation in the international market. Implications of answers you get will be obvious!

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