Rocketing Cost of Oil Causing Chaos for Businesses and the Economy
Following the supply chain chaos and labour shortage due to the pandemic, it doesn’t look like things will get any easier for businesses across the globe and in turn, the economy, as crude oil could soon be reaching the century mark as prices rocket.
According to a new report by JP Morgan Chase & Co economists, with tensions continuing to boil between Russia and Ukraine, it could even spike to $150 creating a supply shock.
Cost increases such as this are normally past on by companies, but since the pandemic hit, this hasn’t been so easy for businesses to do. Extra costs have come to businesses, due to labour shortages increasing wages and freight costs rising due to imported goods being stuck in gridlocked ports as the supply chain buckled under the pressure of the pandemic.
With oil and natural gas now sky-rocketing to their highest levels since 2014, it’s not going to get easier for businesses anytime soon.
Isaac Larian, founder of MGA Entertainment Inc., the maker of Bratz and L.O.L. Surprise! dolls and Little Tikes toys says the $100-a-barrel oil price is “just a disaster.”
Like many toymakers, MGA has some material costs closely linked to the price of oil and natural gas.
“We’re dealing with a consumer that’s stretched, and there will be a point where the price elasticity will take hold,” Larian says. “If a $10 doll suddenly becomes $25, there are people who can’t afford to buy it.”
MGA’s profit margin was down by 5 percentage points in 2021, and it will continue to fall due to the impact of higher energy prices, says Larian.
He also predicts the already high shipping rates and the costs of plastics will rise again this year. And with consumers being faced with rising costs of energy to heat their home and an increase of petrol costs, there won’t be much left to purchase toys if the costs of the products rise considerably.
Crude oil currently costs $90 a barrel, which is an incredible 60% surge in cost compared to its standard price in 2019. It just shows the rippling effect the pandemic has had on the world and its economy.
Manufacturers, retailers, packaged goods companies, and passenger carriers all have to find ways to pass energy costs to the consumer, says Philip Orlando, chief market strategist at Federated Global Investment Management Corp.
“They’re just trying to recover the incremental costs from wages, transportation, and raw commodities,” Orlando says. “They are entitled to make a profit.”
So what businesses will be hit hardest and who will profit?
You would believe trucking companies, railroads, parcel couriers, and maritime shippers would seem to be the hardest hit by higher oil. However, to balance out the crude prices, companies such as these set up fuel surcharges that will automatically pass down to their customers.
United Parcel Service Inc. saw a record profit last year even though fuel and labour are its two largest costs, says Chief Financial Officer Brian Newman. Union workers under contract keep its labour costs stable and it adjusts a fuel surcharge every week to reflect the increase or decrease in gasoline and diesel prices.
For airlines and cruise lines, and other companies that find it harder to make customers absorb fuel price increases, hedging is a far riskier way to manage the cost of oil.
The future doesn’t look all too bright for business, so as always, the TyTek team will keep you advised and appraised of your order with us. If you have any questions, please don’t hesitate to contact us.