Is your business heading for an energy driven profits squeeze?

The lifeblood of business is energy. The transition from manufacturing everything by hand to using power to produce goods transformed the world of commerce and transport in the 19th century and has led to the global industries you know today.


From using water to power weaving looms, through coal to fuel trains and ships and on to oil and gas for the development of the motor industry and for industrial and domestic heating, energy is the one constant you cannot do without.


Finite fossil fuel


Energy prices fluctuate, rising and falling, and it can be hard when you’re looking at how profitable your business is going to be when you’re uncertain about what you will have to pay for the energy you use. You can try to buy futures on the market, setting a price to be paid for future supplies, but you can get caught out as well as hedging your bets successfully. If you have bought high for the future and the price plummets – as it has done recently for oil – you could find yourself in an unpleasant energy driven profit squeeze.


It’s generally accepted that fossil fuels – oil, natural gas and coal – will run out sometime in the future, though nobody can really predict when. As a finite resource, fossil fuels need to be replaced with new sources of energy that are reliable and, above all, affordable for businesses.


Unconventional oil and gas


There has been an upsurge in discoveries and the development of extraction processes for natural gas held in shale formations – so much so that the US is using transport and shipping facilities to export rather than import – and unconventional oil is found in unconsolidated sandstone. These fossil fuels can be difficult to extract, pushing up costs for the companies that mine them that are passed on to businesses that use them, potentially having an impact on profits.


However, businesses using fossil fuels already have the infrastructure in place. In which case, your profits may not be under as much threat as you may have thought in this scenario.


Alternative energy sources


The two major alternative sources you have probably come across are wind and solar power, both with great potential but they need the wind and the sun to make them operate effectively. You can’t completely rely on these sources and they are costly to develop and install. However they are an essential part of how alternative energies need to fit into strategic thinking for how economies will be powered in the future.


Developing knowledge


The impact of carbon emissions from fossil fuels has led to a general acceptance that these contribute to the warming of the earth and thus to climate change. Energy expert and Pulitzer Prize winner Daniel Yergin has written extensively on the history of climate change so you can benefit from his wide knowledge and experience.


Alternative energies will have to fit with conventional and unconventional sources as governments develop strategies that will ensure that businesses benefit from uninterrupted supplies and prices that will not squeeze profits unacceptably.