Let Oil Prices Rise
Oil is pushing $100 per barrel and will likely pass the century mark this week. The national average for a gallon of gasoline is already above $3 (and rising). With increasing fuel costs come price hikes in commodity products—food, raw materials—and services—transportation and shipping. All this gives rise to worries about inflation and a slowing of the economy.
Reality is economic productivity remains healthy. Inflation is relativity stable. And the cost of finished goods and raw materials is increasing, but not at a rampant pace. The reason: operational efficiency brought about by effective use of technology. In this sense, higher oil prices are a good motivator for enterprises and their IT departments.
When Hurricane Katrina knocked out the oil—rich Gulf of Mexico fields and disabled the largest ports for oil imports, economists and analysts feared that supply disruption would cause a cascading inflationary effect throughout the economy. The cost of shipping goods would increase with rising fuel and transportation expenses. And the cost of electricity and industrial fuels would follow a curve parallel to crude.
Likewise, some feared that oil shortages would lead to increased costs for many finished goods. (Oil is not used just for fuel, but is a basic material in many products we take for granted—polymers, chemicals, plastics, paints and packaging.)
The result of these collateral effects of rising crude oil prices would result in reduced consumption and slow overall economic growth.
Well, not exactly. Oil prices and the subprime mortgage crisis, combined, are disrupting the U.S. and global economy. However, economic productivity and consumption haven't been dampened much by rising energy costs. In fact, the result is more beneficial as enterprises search for efficiencies and cost reductions. More often than not, they turn to IT and automation for those savings.
Materials, fuel and transportation costs may be higher, but they're affecting nearly every business equally. This means the enterprise can squeeze out more efficiency through cost reduction but will not have to pass on energy cost increases to customers. IT can provide a competitive advantage to energy—hampered enterprises.
Yes, enterprises have been looking to virtualization to reduce the number of servers and storage arrays in their data centers, which helps reduce staffing and electrical consumption costs. The next stage of energy—driven efficiencies will come from network management, business intelligence software, supply chain management. Enterprises that crack the code in highly targeted marketing, accurate raw material acquisition, fine—tuned manufacturing cycles and factory orders, and just—in—time supply chain management will contain their operational costs and maintain competitive market pricing.
The time has finally arrived to consider how to operate in an inflationary economy with $100—plus barrels of oil. This is more than about saving money and cost containment, but searching for the efficiencies that will improve revenue and give your enterprise a competitive advantage over its market rivals.
Lawrence M. Walsh is editor of Baseline magazine and regular columnist to Channel Insider.
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