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
Pre-empting the energy shockwave
