Oil prices are volatile. In the past two decades alone, the cost of oil exceeded the $100-per-barrel mark in six different years —with 2022 being the most recent—and there’s no reason to think that 2024 is safe from such a recurrence.

For manufacturers, this means a major risk to be managed. On any given day, their overhead may skyrocket as the cost of operating vehicles and machinery follows the caprice of the market. They must either compensate for that risk ahead of time, or for the damage after the fact.

There are, however, tried-and-tested methods of addressing the oil problem for those who wish to take the former course. By gathering reliable information about the possible and probable swings of the market, and by taking appropriate measures in response to that information, manufacturers can ensure that their company has the best possible chance of emerging from high oil prices unscathed and ahead of the competition. 

Sourcing Market Predictions

As in any field of risk management, knowledge is everything. The establishment of reliable sources of information on the oil market lays the foundation for every other step. A proper market-analysis engine, meanwhile, can advise the manufacturer months or even a year in advance if oil prices are likely to rise, and precautionary measures should be taken. For that reason, thoroughly sourcing market predictions should be a manufacturer’s top priority.

Companies may choose to outsource the task by hiring professional industry analysts who specialize in gathering and processing data on the oil market, or by subscribing to market reports from organizations such as the International Energy Agency (IEA) or Energy Information Administration (EIA). Additional ways to acquire reliable third-party information include monitoring data and forecasts from commodity exchanges, investment banking firms, government departments such as the U.S. Department of Energy (DOE), and international agencies. 

If the company is willing to take a more active part, it may also choose to collaborate with academic institutions or market research firms to produce its own data. This, as well as any other source that doesn’t pre-process the raw numbers, requires that the manufacturer have some internal means of analysis. Employment of full-time analysts, adoption of artificial intelligence and big-data analytics software, or a combination of both can help to satisfy that need.

Finally, manufacturers should keep an eye on external influencing factors. Legislative changes can have dramatic effects on the oil market, so monitoring new or amended policies and regulations can indicate market fluctuations long before the numbers do. By subscribing to policy-analysis reports, companies can better understand the implications of each change. Other external factors, like international trade politics or conflicts in foreign territories, should also be considered.

Through a combination of the strategies mentioned above, manufacturers can construct a dependable and comprehensive engine for market predictions. The more accurate information the company is able to gather, the more complete its forecasts will be. It’s worth noting that short-term forecasts are generally more accurate than long-term ones, and should be weighted accordingly. Keep in mind also that even the most precise forecasts are only that, and manufacturers will do well to have contingencies in place for the likeliest, best-case, and worst-case scenarios.

Reducing Oil Dependency

This consists of three forms of investment: updating machinery, adopting alternative fuels, and building client relationships. All three are costly endeavors, and should be undertaken in direct proportion to the risk being managed. The decrease in profits forecasted by market predictions should justify the money invested in reducing oil dependency — precisely why accurate market predictions are so essential.

Updating machinery can make a significant impact on the amount of oil needed for factory operation. Modern machines tend to be far more fuel-efficient than their legacy counterparts, and are often capable of faster and more precise work as a bonus. The profitability lost to high oil prices can therefore be offset not only by lower operating costs, but also by the competitive advantages of increased quality and rate of production. Updating machinery does have significant initial costs, from purchase to installation to factory downtime and employee training, all of which must be considered before a decision is made.

When it comes to adopting alternative fuels, there are many to choose from. Common options include electricity, hydrogen and biofuels. The markets for these may or may not be more stable than that of oil, but diversifying fuels limits the damage that any one market can do to overall profitability. Certain alternative fuels may also be less expensive than oil in the long-run — though this is not always the case — while cleaner fuels may come paired with government incentives and subsidies. Manufacturers should bear in mind, though, that each fuel comes with its own unique challenges in infrastructure, availability and performance.

Finally, when all else fails, good rapport with the client base can keep a manufacturer afloat. It’s therefore imperative to build and maintain strong client relationships. This can be done via frequent and transparent communication, consistent quality and delivery, and long-term cooperation toward shared interests. The more value a client attributes to the manufacturer, the more likely it is to pay steeper prices when oil costs rise. There will always be a limit to how much grace the client is willing to show, of course, but raising that bar is often a worthy investment.

Oil prices will continue to rise and fall. How manufacturers respond to that fluctuation will ultimately determine their resilience against it. Those who fail to compensate will always operate at the mercy of the market, steadily giving up profits until the mounting overhead forces them to fold. Those who are willing to proactively invest in predicting and reacting to the market, meanwhile, will not only weather $100-per-barrel prices and beyond, but emerge therefrom stronger and better-equipped than before.

Taylor St. Germain is an economist and speaker at ITR Economics.