$80 a Barrel. Now What?

Switch suppliers? Eat the cost? Or shut down some operations? With energy costs soaring, leaders face some unappealing options.

Most business leaders didn’t expect the price of oil to stay at $20 per barrel like it was when the world’s economies ground to a halt in the spring of 2020.

But few expected the surge we’ve seen in the last few weeks, with oil topping $80 a barrel and hitting three-year highs. Natural gas spot prices in both Europe and Asia have rocketed while natural gas futures prices in the United States are at inflated levels not seen since December 2008. Now, leaders are left pondering which of several unappealing options to take to deal with the higher energy costs, as many experts suggest high energy prices aren’t going away anytime soon. “What we’re seeing now is not normal, to be honest,” says Jorge Gomar, a Korn Ferry senior client partner who specializes in industrial manufacturing.

Inflation has been a worry for many since this spring, when the prices of corn, soybeans, and copper reached multiyear highs. But the recent energy spike is a consequence of myriad events, many of which have been building on one another over the last 18 months. The initial wave of COVID-19 outbreaks curtailed production of oil and natural gas as production facilities lost workers. The world could handle that until the winter, when a worldwide cold snap caused an uptick in demand for energy.

Then, earlier this year, economies around the world rebounded, increasing the need for fossil fuels as either gasoline for vehicles, power for electricity, or feedstock to make other products. “There was no time to build up gas reserves,” Gomar says.

Some forward-thinking, heavy-energy-consuming firms, such as airlines and cruise ships, used hedging strategies to lock in oil prices when the commodity was trading between $20–$30 at the start of the pandemic. “They locked in as much as they could,” says Richard Preng, a senior client partner in Korn Ferry’s Energy practice.

But it’s likely too late for most firms to lock in energy prices using hedging strategies, Gomar says. Even if oil prices rise near $100 a barrel over the next few months, which some analysts predict, the cost to create a hedging strategy likely would eat up any savings on the actual commodity.

That leaves some unideal alternatives for leaders. Some have actually taken drastic steps to shut down production lines, either because they can’t get the fuel they need or the cost has become prohibitive, Gomar says. The spike has caused other firms to see if they can wring cost savings from other sources, such as switching to lower-cost suppliers. Some big manufacturers, in a competitive move, might try to absorb the higher costs, betting that their rivals will not be able to.

Most likely, however, is that everyone will try to pass along their higher costs to their customers. It will be a little easier to justify a price increase because everyone can easily look up how much energy prices have spiked in the last several weeks. “That’s annoying, but that’s OK because nearly everyone is doing it,” says Mary Elizabeth Sadd, a Korn Ferry senior client partner who works with many packaging firms.