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In the wake of the recession, companies have few ways to address skyrocketing oil costs.
Marielle Segarra, CFO Magazine
June 1, 2011
With oil prices averaging nearly $4 per gallon (as of late May) and gas prices reaching all-time highs in some parts of the country, finance chiefs are once again struggling to find ways to keep their energy and materials costs down. But the weak economy — and their companies' relatively lean cost structures — are limiting their options.
Following the last oil-price spike, in 2008, some CFOs made changes to protect their companies from future market volatility. APC Construction, for example, uses asphalt cement (an oil derivative) to build highways. To cut oil costs, APC has been steadily increasing the use of recycled asphalt in most of the roads it builds. The practice can save $5 per ton of asphalt, a significant savings given that the company uses at least 350,000 tons annually.
But APC still feels the impact of rising oil prices: it uses more than one million gallons of diesel fuel a year to transport the asphalt to job sites. Meanwhile, plummeting demand in the highway-construction market has forced the company to lower its own prices, eroding its margins.
Whether companies feel the pressure of rising oil prices directly or indirectly, many CFOs are hesitant to pass any associated cost increases along to customers. Carton manufacturer Mod-Pac uses natural gas to power its plants, for example, but the mills that supply its paperboard and the transportation companies that ship its products rely heavily on oil. They raise their prices when oil prices spike, says CFO David Lupp, but "we can't raise our prices simply because our costs go up. We have market pressures; there's plenty of competition out there. A paper mill has a much easier time [raising prices] because there aren't very many of them. A company like ours gets squeezed a little bit."
Mod-Pac's only other option is to negotiate lower rates from its suppliers and shipping companies whenever possible, Lupp says. (For more on pricing strategies, see "The Price Is [More] Right.")