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Rising oil prices pose challenges for many companies as well as consumers, which is why rising oil prices are often seen as damaging to the economy.
1. Rising oil prices increase costs for many companies. These costs may be difficult to pass on to customers, who are loathe to pay more for the same goods, thereby eroding profit margins.
2. Rising oil prices reduce consumer demand for products that consume oil.
3. Rising oil prices make travel and shipping more expensive.
* Oil & Gas Refining & Marketing companies buy crude oil, process it, and sell the processed product to the end market. Companies like Sunoco, Valero, and Western Refining are all prolific U.S. refiners. When these companies must purchase crude oil at a higher price, they then have to sell the refined product (gasoline, jet fuel, diesel, etc.) at a higher price, which then causes demand to drop as people travel less. Furthermore, refined goods prices rise by a smaller amount than crude price. At the end of the 1990s, oil traded below $20/barrel[8], while gasoline cost under $1.50/gallon[9]. In June 2008, crude traded at around $121 (after rising to over $135)[10], while gasoline averaged $4.10[11]. Oil prices rose by a factor of six, while gasoline prices rose by less than a factor of three. The clear losers, in this case, are the companies that make and sell gasoline, though when oil prices fall, they fall further than gasoline prices, making refiners the winners.
* Shipping companies are harmed by higher oil prices because oil is necessary to operate the planes, trucks, and ships that transport goods around the globe. These companies include brand-name shipping companies like FedEx and UPS, industrial shipping companies like TNT and Con-Way Trucking, and international shipping companies like Teekay Shipping and Frontline. LTL trucking companies, however, are relatively shielded from fluctuations in diesel fuel prices, as the industry generally passes on fuel price surcharges to its customers like Wal-Mart Stores (WMT). Also, aircraft leasing companies such as Aircastle (AYR) are hurt by rising oil prices.
* Airlines like Delta, Northwest, United, and American Airlines are harmed by rising oil prices; in the past, jet fuel has accounted for 10-15% of an airline's cost, but by mid-2008 they made up 30-50% of costs[12], albeit before the price collapsed below $50/barrel.
* The lodging industry sees declines in occupancy rates and revenues when oil prices rise, as higher travel prices cause fewer consumers to take vacations.
* Other vacation and travel alternatives (e.g. cruise lines like Royal Caribbean Cruises and Carnival) see higher fuel costs, forcing them to raise prices and drive potential customers away.
* The Chemical industry is harmed by higher oil prices because petroleum is a key ingredient in plastics. As the price of oil rises, plastics become more expensive to produce, causing margins to shrink.
* The retail industry is harmed by rising oil prices because shipping companies charge higher prices, making it more difficult for retailers to get their products to market and forcing them to raise prices. Discount retailers, including Family Dollar Stores, Dollar Tree Stores, Big Lots, Wal-Mart, Target and Dollar General are especially exposed as their consumers generally have lower incomes, making them more sensitive to rising energy prices.
* Online retailers that subsidize the cost of shipping, like Amazon.com and Overstock.com, are forced to pay part of the shipping price increases, causing margins to shrink.
* Car companies that are heavily dependent on sales of SUVs for profits, such as General Motors and Ford, see fewer sales as consumers tend to reduce their purchases "gas-guzzlers" when oil prices are high.
* Automotive parts retailers like AutoZone, Advance Auto Parts, and O'Reilly Automotive, who depend on heavy driving and automotive wear-and-tear, struggle when drivers conserve due to high oil prices and demand fewer repairs.
* Automotive retailers like AutoNation and CARMAX depend on replacement demand for new cars due to wear-and-tear, which decreases as fewer people drive.
* Chinese manufacturers lose their low-cost production advantage, as rising oil prices cause the prices of whatever is being shipped from China to be artificially inflated. Lower oil prices, at around $20/barrel, were equivalent to low tariff rates (about 3%). With the oil that was being used in shipping during the 2nd quarter of 2008, the equivalent tariff rate was around 9% and rising (until the bubble burst).[13]
2. Rising oil prices reduce consumer demand for products that consume oil.
3. Rising oil prices make travel and shipping more expensive.
* Oil & Gas Refining & Marketing companies buy crude oil, process it, and sell the processed product to the end market. Companies like Sunoco, Valero, and Western Refining are all prolific U.S. refiners. When these companies must purchase crude oil at a higher price, they then have to sell the refined product (gasoline, jet fuel, diesel, etc.) at a higher price, which then causes demand to drop as people travel less. Furthermore, refined goods prices rise by a smaller amount than crude price. At the end of the 1990s, oil traded below $20/barrel[8], while gasoline cost under $1.50/gallon[9]. In June 2008, crude traded at around $121 (after rising to over $135)[10], while gasoline averaged $4.10[11]. Oil prices rose by a factor of six, while gasoline prices rose by less than a factor of three. The clear losers, in this case, are the companies that make and sell gasoline, though when oil prices fall, they fall further than gasoline prices, making refiners the winners.
* Shipping companies are harmed by higher oil prices because oil is necessary to operate the planes, trucks, and ships that transport goods around the globe. These companies include brand-name shipping companies like FedEx and UPS, industrial shipping companies like TNT and Con-Way Trucking, and international shipping companies like Teekay Shipping and Frontline. LTL trucking companies, however, are relatively shielded from fluctuations in diesel fuel prices, as the industry generally passes on fuel price surcharges to its customers like Wal-Mart Stores (WMT). Also, aircraft leasing companies such as Aircastle (AYR) are hurt by rising oil prices.
* Airlines like Delta, Northwest, United, and American Airlines are harmed by rising oil prices; in the past, jet fuel has accounted for 10-15% of an airline's cost, but by mid-2008 they made up 30-50% of costs[12], albeit before the price collapsed below $50/barrel.
* The lodging industry sees declines in occupancy rates and revenues when oil prices rise, as higher travel prices cause fewer consumers to take vacations.
* Other vacation and travel alternatives (e.g. cruise lines like Royal Caribbean Cruises and Carnival) see higher fuel costs, forcing them to raise prices and drive potential customers away.
* The Chemical industry is harmed by higher oil prices because petroleum is a key ingredient in plastics. As the price of oil rises, plastics become more expensive to produce, causing margins to shrink.
* The retail industry is harmed by rising oil prices because shipping companies charge higher prices, making it more difficult for retailers to get their products to market and forcing them to raise prices. Discount retailers, including Family Dollar Stores, Dollar Tree Stores, Big Lots, Wal-Mart, Target and Dollar General are especially exposed as their consumers generally have lower incomes, making them more sensitive to rising energy prices.
* Online retailers that subsidize the cost of shipping, like Amazon.com and Overstock.com, are forced to pay part of the shipping price increases, causing margins to shrink.
* Car companies that are heavily dependent on sales of SUVs for profits, such as General Motors and Ford, see fewer sales as consumers tend to reduce their purchases "gas-guzzlers" when oil prices are high.
* Automotive parts retailers like AutoZone, Advance Auto Parts, and O'Reilly Automotive, who depend on heavy driving and automotive wear-and-tear, struggle when drivers conserve due to high oil prices and demand fewer repairs.
* Automotive retailers like AutoNation and CARMAX depend on replacement demand for new cars due to wear-and-tear, which decreases as fewer people drive.
* Chinese manufacturers lose their low-cost production advantage, as rising oil prices cause the prices of whatever is being shipped from China to be artificially inflated. Lower oil prices, at around $20/barrel, were equivalent to low tariff rates (about 3%). With the oil that was being used in shipping during the 2nd quarter of 2008, the equivalent tariff rate was around 9% and rising (until the bubble burst).[13]
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