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With the price of crude oil hovering at roughly $50/bbl, many companies might be reevaluating their industrial energy management (IEM) strategies. Certainly consumer behavior is changing in the face of low energy costs. Sales of less fuel-efficient larger vehicles and pickup trucks are increasing, people are traveling more as fuel costs drop, and consumer goods spending is up as people have more discretionary funds.
Certainly the economics of an energy conservation project change when oil is 40% of what it was at the peak and natural gas prices are near record lows. This may prompt many companies to consider abandoning their IEM initiatives, at least for the time being. This is a mistake. Change priorities—yes. Focus on more strategic elements of an IEM program—yes. But don’t push IEM off the table. To do so is shortsighted and it will ultimately backfire.
Energy Costs Are Likely to be Volatile
Current prices are depressed thanks to increased production of oil and natural gas in the United States, as a result of new technologies like hydraulic fracturing or fracking and the OPEC states' inability to agree on volume quotas. However, as prices drop the economics of fracking and shale oil production change, the seemingly endless production volumes of today are likely to fade.
In addition, given the increasing fuel efficiency of vehicles and the low prices, many states and the U.S. Federal government are talking about gas tax increases. So while crude prices may remain lower, fuel costs, which impact supply chain transportation costs, are likely to increase. Some leading industry pundits are predicting costs could go as high as $5/gal in the not-too-distant future.
While oil may not be the primary energy cost for many businesses, the price of oil and natural gas impact other energy costs such as coal and electricity. With the recent change of leadership in Saudi Arabia, short-term oil price volatility is also likely. Also, ongoing turmoil in Crimea has a high probability of adding to price volatility. The best advice then is to plan on longer-term energy cost escalation while leveraging lower costs today.
Leveraging Today’s Lower Energy Costs
With the exception of the energy industry (which we will talk about in another post), almost all businesses will benefit from the lower cost energy in the short term. Smart companies will utilize some of the savings they are seeing as a result of low oil prices and invest in IEM projects and technology. While the ROI may not be as appealing as when energy costs are high, funds availability is a factor that must be considered.
One thing that remains constant regardless of energy prices is carbon/unit of energy. So for businesses that must or wish to reduce their carbon footprint, energy prices are essentially a non-issue. While energy costs are low, it is the ideal time to focus on high-carbon energy reduction projects. By doing this, intangible benefits will help justify appropriate investments.
Another reason to invest while energy costs, particularly natural gas, are low is that if alternative fuels are needed for a capital retrofit such as a boiler replacement or refurbishment, the project cost will be lower. Taking a primary energy source offline and using alternatives can account for a significant portion of the non-capital costs associated with such a project and now is the time to take advantage of the price breaks available.
Finally, when energy costs are low, the cost of capital, transportation costs, and even potentially contract labor will be lower, so the economics of any project need to be carefully calculated. It isn’t a matter of if energy costs will rise, it is only a question as to when. While the absolute savings may not be as great right now, the investment costs are likely to be lower and the intangibles like carbon footprint reduction will be just as good. So it still is a good time to invest in IEM projects, be they capital asset replacement or technology upgrades.
All entries in this Industrial Transformation blog represent the opinions of the authors based on their industry experience and their view of the information collected using the methods described in our Research Integrity. All product and company names are trademarks™ or registered® trademarks of their respective holders. Use of them does not imply any affiliation with or endorsement by them.