How Crude Oil is Affecting the Utah Economy
The Oil Price Drop
The oil market is an important economic driver for all business owners to understand, since it affects numerous aspects of the economy. The price of crude oil has dropped over 50% since the summer, driven primarily by over-supply problems. On top of these production issues, OPEC’s (Organization of Petroleum Exporting Countries) meeting last November brought the unwelcome news that it would not cut production, which would have helped to stabilize prices. OPEC accounts for approximately 40% of world oil production, and as such has power in determining prices. Analysts are guessing that OPEC is refusing to cut production as part of a pricing war to weed out U.S. shale drilling.
As a local business owner, it is important that you understand how crude oil prices will impact your business. Fortunately, because Utah isn’t a key oil state (as opposed to a state like North Dakota), this won’t directly impact local businesses, or the local economy, as much. However, there are many other aspects of business, and various industries, that are impacted by the oil market and it is important that you understand how your company is being affected.
Let’s discuss a few of the major areas that have been and will be significantly influenced with lower oil prices: consumer spending, transportation, and heating. “How price sensitive your business and your industry is to lower oil prices” would be an excellent discussion to have with your full-time or temporary CFO.
Major Industries Affected
One of the largest changes we will see is a change in consumer spending, since less money spent at the pump means more money spent on discretionary ticket-items. Any type of transportation from taxis to trucking to airlines stands to make large gains since gas is one of the largest expenses on their income statements—so I anticipate that all of the logistics companies that are headquartered in Utah, or that do work with those companies, will probably benefit. Finally, both heating oil and gas companies will be hurt since oil prices determine their top lines, sales.
The important thing to remember in your specific discussion about your business and dropping oil prices is to carefully consider what areas of your business are tied to those prices and how you can take advantage by increasing your revenue or lowering your costs. Another major consideration to think about is the scenario of rising oil prices—how will you invest/save for a rainy day?
If your company doesn’t have high-level finance help, the services of a temporary CFO or part-time CFO can be very helpful in analyzing potential implications and creating action items.
Your ability to identify these areas and take advantage of the situation could very well mean the difference between you and your competitors. In my experience visiting hundreds of companies, the small and seemingly insignificant changes can make the biggest differences.