I am neither an economist spending my time drawing graphs on a chart nor am I dealer in oil futures. I am simply a businessman who works in an oil dependent industry – as all industry is oil dependent but mine particularly so.
What am I thinking and how am I reacting right now as an industrialist with oil prices steadily and irrevocably trending heavily upward?
You need to keep a cool head in assessing what is going to happen to your costs and sales revenue. You need to try and second guess the market place and keep the investment in capital, people and plant one step ahead of the economic cycle. You need to try and anticipate when the downturn may come and not react too quickly and not react too late.
Get it wrong and you can do immeasurable financial harm to your business and its shareholders. For this reason, no matter how well defined your planning process is, a great deal of decision making is based on short-termism.
Right now, I have called in my business development team and am refreshing my mind on the implications of the worst case scenario that they drew up six months ago. I am not doing so to take immediate action but to be ready to take action shortly.
The reason for my concern is a continuation of the bad news regarding oil. Today’s mid-day BBC report explains:
In London, Brent crude futures nudged over $57 a barrel, while US crude broke through the $58 mark.
Prices rose on concern over US refining capacity and earlier predictions that the price could eventually exceed $100.
Opec’s president said consultations had begun with its members on raising output by 500,000 barrels a day.
Indonesian oil minister Purnomo Yusgiantoro said he had not been contacted yet, but would support the proposed increase.
Qatar and Kuwait have also said they would support an increase.
Nigeria’s presidential adviser on petroleum, Edmund Daukoru, thought a decision would be made in 10-14 days if prices stayed above $55.
The chance of a rise in supply had been left open at the last Opec meeting.
‘Super-spike’
“We had suspended [discussions] for a period of time because of the decline in prices,” Opec President Sheikh Ahmad al-Fahd al-Sabah said.
“But now the reality of prices requires that we once again undertake communications for the purpose of consultations with the fellow Opec oil ministers… pertaining to the 500,000 barrel per day hike.”
What is important to me is not the price. We knew about this some days ago, despite the short period when the price seemed to ease and this seemed to be reflected in the currency markets. Goldman Sachs told us on 2nd April that the spike in oil prices could go as high as $105 per barrel.
What has caught my attention today is the decision for Opec to finally meet again and review output. Some of the speed and urgency behind this meeting is shown by the open commitments already obtained to increase output by some of the smaller producers if Opec so agrees. I watch the increasing speed and rapidity of their meetings and it is like the whistle of an oncoming freight train as an alert of crisis ahead.
I need to know as an industrialist what could happen.
I call in my Business Development people.
These planners show me the scenarios produced by the UK Treasury forecasters and a summary of the combined product of some twelve to fourteen other forecasts, tweaked by my own people and modified for my industry and my own business. This is where my competitive advantage could come. I have some of the best planners available.
Of course, I have the London Business School forecast in the top drawer of my desk that I produce and talk to against their assessments. Not because it is necessarily better, but because I am familiar with it and it sets a base for me to interpret the mass of information being thrown at me.
I’m a bit of a wily old bird and I like my lessons from the past. It gives me an edge over these bright youngsters sitting round the table crunching these figures as we speak. What does the past tell me? This BBC report sums it up:
For the wider world, oil prices went through the roof, from around $3 a barrel before the war to over $11 by early the following January.
The crisis led to a recession in 1975, the first of four world downturns where oil price increases caused by events in the Middle East played a key role.
It took one to two years for the recession from the oil crisis to really bite and when it came it was severe and damaging. My gut feel says this one will be faster in coming, longer lasting and greater in depth. The ability for governments and industry to react will be more difficult and the options fewer.
I know that I shall have to act. I need to do some stockpiling to hedge against scarce supplies in certain raw materials and other commodities albeit for a much reduced market demand. I need to put pressure on my sales force now to maximise what the faltering market has left to demand. I need to get production rates up but start reducing my inventory levels of finished stock. Overtime working will increase but new hires will fall or be frozen. It will be a ferocious few months. The irony is that this may seem like an upturn to my suppliers and employees but I will know it is only the mechanism for preparing for the recession that is coming.
I’m guessing I have nine months and that now is not too early to be responding to the crisis. First I need to test my gut feel. I want to call my senior colleagues together from across industry. We need a delegation to go to the ministry. We know they will want to convince us to maintain investment and productivity levels. Nothing creates a recession more than the fear of a recession. We want to know, however, what the Saudis are saying, what the diplomats are getting fed to them from China and what Defence and Intelligence is saying about current and future conflict in oil producing areas. It will be a series of difficult meetings. We don’t talk the same language, they are politicians and we are businessmen. We are not trained the same, we have different agendas. One thing all of us know, however, is that we must not get this dialogue wrong. It has happened too often in the past.
Monday, April 4, 2005 and the sun is shining outside and I wanted to get away early but from here on in I know I shall be stuck in late night meetings, quiet but intense one-to-one dinners and major conferences from now until August and then the real action will begin in September. I dismiss the planners and ask my secretary to have Louis bring the car round.
As I leave the building I look back at it and sigh. The last five years have been an excellent period of stable, managed growth in a stable and well managed economic climate. What every businessman wants. That is about to change. Managing that change is what my big salary, luxurious car and all the other benefits are about. I hope for as many of my employees as possible that I’m up to the task.
