What Lower Oil Prices Mean to Your Company

May 9, 2015

2015-May-Client-Bulletin-4As of this writing, crude oil sells for around $55 a barrel, down from over $100 in mid-2014. The last time oil prices were (briefly) this low was at the start of 2009, at the nadir of the financial crisis. Lower oil prices have driven down the cost of gasoline by nearly 30%, to around $2.50 a gallon, while home heating oil fell by more than 30% this past winter, to less than $3 a gallon.

Such changes can have a huge impact on small companies—surveys indicate that some businesses benefit by thousands of dollars a month. If your company will enjoy this type of windfall, you can decide what to do with it.

Lower costs

For many companies, the most obvious result of lower oil prices is a drop in transportation costs. Your company is paying less now for gas for any company cars; employee fuel reimbursements probably are down as well. If your company has vehicles it uses for service or deliveries, you’ll also see reduced outlays for buying fuel to run them.

Companies in cold-weather areas of the U.S. may have paid less for heat this past winter, despite some frigid spells. You also may be paying lower utility bills as the heating season transitions to air conditioning months. Altogether, the steep drop in oil prices acts like a meaningful tax cut for many small businesses.

Higher revenues

Making this good news even better, lower oil prices also act like a tax cut for your customers. If you deal with consumers, the money they’re not dumping into their cars’ gas tanks may wind up paying for your company’s products and services.

For certain types of businesses, lower gas prices mean that it’s more likely that you and other company representatives will drive to see clients or prospects, resulting in increased sales.

Even if you don’t deal directly with consumers, lower oil prices can have a ripple effect that brings in more business. Lower costs might speed up real estate construction, for instance, which would help companies serving that industry. What’s more, lower oil prices may keep inflation down, which could lead to continued low interest rates and a favorable climate for borrowing money to help your company grow.

Troubled territory

As is often the case, falling oil prices produce losers as well as winners. If your customer list includes energy companies, you stand to lose
business as those firms reduce capital spending, lay off workers, and so on. The same can be true if you have a local business serving an area that has prospered in the recent American oil drilling boom.

Nevertheless, most small companies stand to come out ahead from lower oil prices. The extra profits might go to bolster your balance sheet, if it’s still feeling the effects of the 2008–2009 downturn. Other uses of increased cash flow might include business expansion, improving customer service, paying bonuses to current employees to boost morale, and hiring more workers.

Will oil prices stay down or will they bounce back into triple digits? No one can say, just as few seers predicted the recent retreat in dollars per barrel. Apparently, worldwide slackening of economic growth along with increased oil supplies may hold prices down
for a while. In any case, the possibility of relatively inexpensive oil should be in your company’s current business plan, as well as
ideas about what to do with any plumper profits.

Moreover, if you are expecting an increase in profitability because of lower oil prices (or for any other reason), you should review your estimated tax strategy to make sure you avoid underpayment penalties.