energy costs

The inevitable long-term rise of energy prices poses a serious risk to corporate profitability. A Deloitte study, released at the World Economic Forum in Davos in 2009, showed that even modest 3.5 per cent year-over-year increases in energy and resource input costs could wipe out the profitability of a vast number of North American firms. To put 3.5 per cent increases into perspective: The price of oil was $10 a barrel in 1999 and ran up to $147 in 2008 – that represented a 40% annual compounded increase. Jeff Rubin, the former chief economist of CIBC World Markets, predicts oil will hit $225 a barrel in 2012. Heightened tensions with Iran, the fourth largest oil producing country worldwide, could be the catalyst for the run up in oil prices. A risk for Canadian manufacturers is that the Canadian dollar has become a petro dollar. When the price of oil rose to $147 a barrel, the Canadian dollar hit its highest point in decades against the U.S. dollar. And that in turn hit Canadian exporters hard. How can exporters mitigate the risk of a high Canadian dollar? One way is by becoming more energy efficient, lowering the cost of production. Another, of course, is through hedging against a rising Canadian dollar through currency swaps. Energy efficiency is a powerful profit driver and risk mitigation strategy. Walmart is spending $500 million a year on fuel and energy efficiency projects with paybacks of four years or less. During the recession, the company’s … [Read more...] about Pre-empting the energy shockwave