How far will oil prices fall? Nobody seems to know. As of yesterday, crude oil had dropped an additional $1 to $53 a barrel, following previous decreases earlier this month. Prices for oil haven't been this low since May 2009.
That's good news for car-driving consumers who are now paying less at the pump--on average, gas is about $2.90 a gallon. It's also good for businesses, as consumers may suddenly have more money to spend in your store. The news isn't all cheery, however. For some small businesses, the falling price of oil adds new risks and concerns, forcing them into something of a precarious balancing act.
Just ask Dan Singer, co-president of Robison Oil and Original Energy, home heating oil companies with a combined 200 employees, based in Westchester and New York City. The nearly 100-year-old family owned business operates a fleet of more than 100 trucks, vans, and cars. It also provides the oil that heats large apartment buildings and people's homes in the area.
On the one hand, the falling price of gas at the pump is great for Singer's fleet, returning about 30 percent of budgeted fuel costs to the bottom line. On the other hand, it's causing quandaries as customers balk at contracts, and issues surface with Singer's own supplier of oil, which is costing the company millions of dollars.
"Many building owners and homeowners [purchased contracts] in September when oil prices were about 50 cents lower than last year," Singer says. "But prices are now 60 to 70 cents lower than September, and we're just getting started with the heating season."
Customers, of course, don't want to pay the higher prices they agreed to, and some want to renegotiate contracts, Singer says. On the other side of the equation, Singer's oil supplier requires an immediate margin payment for Singer's own contract, also bought at a higher price than current levels.
"It is a cash flow stress if I agree to sell at $3.50 a gallon, and I was buying at $3 a gallon, and now prices are $2 a gallon," Singer says.
Costs and Benefits
A number of factors have influenced the recent drop in oil prices, among them the slowdown in economies globally, from China to the European Union. An overproduction of oil has also played a role, with the U.S. producing more energy from shale oil deposits, and Organization of the Petroleum Exporting Countries (OPEC) holding its output steady, even as prices drop.
How long the current prices will remain low is anyone's guess. Still, where smaller businesses may see a benefit is in a reduction of fuel surcharges for shipping products, and potentially on utility costs related to running your business, although it could take months of sustained lower oil prices before it filters into energy bills, says Kathryn Kobe, senior economist for Economic Consulting Services in Washingtion, D.C.
In the short term, she adds, it is likely that many businesses will benefit from customers with fatter wallets. "It increases everyone's purchasing power if people don't have to spend it all at the gas pump," Kobe says.
Better Than the Alternative
For entrepreneurs like Singer, the current price drop for oil is certainly better than the alternative, which is a sharp rise in the cost of oil. Singer recalls how oil spiked to $140 a barrel shortly before the Great Recession, and then plunged to the high $30s a barrel as the economy seemed to be unraveling.
"When prices came down, many customers did not care about their relationship with me, or what was right or wrong when they saw their building values and stock portfolio values go to zero," Singer says. "They were looking to find money any way they could."
By contrast, today's economy is more resilient and significant threats to it seem more remote. And that suits entrepreneurs like Singer better.
"Overall we prefer it when oil prices remain stable," Singer says. "But, I prefer them to be lower than higher."