If you’re worried about the rising cost of gasoline and crude oil on your business, start thinking beyond basic transportation costs. Analysts are now saying that the cost for raw materials derived from crude oil will start following the same trajectory as gas prices at the pump.
Setting aside the entire foreign dependency for energy debate and the calls for going green, the U.S. economy and way of life is entirely fueled by the black gold. Oil is the basic building block for the plastic and synthetic materials that we resell, use and service on a daily basis. Nearly three years ago, economists were debating whether the country’s economy would stall under the weight of $80 per barrel crude. Today, oil futures are trading at the unthinkable level of $140 per barrel and many market analysts are predicting $150 prices by the Fourth of July holiday weekend. For those keeping track, $150 per barrel oil will translate into $5 per gallon gasoline.
The U.S. oil-based economy is being shaken to its core. The affect of rising energy costs will spread far beyond fuels costs. Here are three ways rising oil costs will impact the channel.
1. Transportation Costs
The cost of getting around is getting more expensive on a daily basis. In 2004, the price of unleaded gasoline was around $1.75 per gallon. Today, it’s above $4 per gallon…and rising. The impact is twofold: rising costs for basic transportation and rising cost for moving freight.
Airlines are already beginning to buckle under the weight of rising fuel costs and are adding surcharges and new fees to cover their costs. Cargo carriers are beginning to pass on their increased costs to distributors, which is translating into higher costs for wholesale and retail goods. And the cost for rolling a truck to a customer site is more than twice it was just three years ago.
Solution providers will find themselves making the same difficult choices as their customers: increase prices, decrease costs or a combination of both to stay viable. Already, many solution providers are cutting back staff and operations as their customers slow down IT activity.
2. Raw Materials to Finished Goods
Many people don’t realize that crude oil yields numerous chemical compounds that are found in nearly everything we touch. Computer cases, keyboards, monitors, cable casings, motherboards, flash drive, CDs and many more common products the channel resells and services are made with the chemicals distilled from oil.
Dow Chemical recently announced a 20-percent hike for its products. On the surface, what Dow does shouldn’t necessarily affect our daily lives. But it does, since much of what Dow makes are the basic building blocks for everything from product packaging to the components of our sophisticated computer systems.
Manufacturers will have little choice but to pass along the increasing raw materials and production costs to their channel partners. That will result in higher MSRPs and, if end users push back, lower profits for solution providers.
3. Customer Pull Back
In the eyes of the law, corporations are no different than people—they are unique individuals. Likewise, corporations often act like people during a down economy: They cut back spending to cope with lower revenue and higher costs.
Economic indicators and our own Ziff Davis Enterprise surveying show end-user organizations are cutting back on spending across the board. A recent survey conducted for CIO Insight (a sister publication to Channel Insider), found CIOs were cutting spending on emerging technologies in Q2. Emerging technologies are another way of saying “discretionary IT spending.”
That doesn’t bode well for solution providers, who often push new products as a means of expanding the spending of existing accounts.
OK, that’s the bad news. While dismal in its outlook, some of this can be seen as opportunities for solution providers.
Green IT, for instance, is quickly evolving from a marketing tagline to real implementations because end users are finally figuring out that the average cost of powering a server or storage array is three times more than the purchase price. In fact, most solution providers—particularly resellers of VMware, Citrix and Microsoft—say virtualization is the leading technology for reducing customers’ operating costs.
Rising transportation costs may rekindle interest in teleconferencing as an alternative to flying people around the world for 30-minute meetings. Several vendors—including Cisco Systems and Hewlett-Packard—have high-resolution, high-availability video conferencing systems that create the illusion of being in the room with disparate meeting participants. As costs come down, teleconferencing could make the red-eye obsolete.
And as some companies are considering four-day workweeks and expanded telecommuting, remote access will become essential for an expanded user base. For solution providers, this means creating the secure and reliable infrastructure that extends applications and services to users in their homes.
Of course, solution providers selling managed services and IT automation systems will be big winners in the oil-deprived economy. As truck rolls become more expensive, managed service providers will have a cost-containment edge over conventional services companies, since they won’t have to put feet on the ground at customer sites as often for routine and emergency maintenance. For end users who won’t take the managed services plunge, IT automation systems will offer more efficient remote management of their distributed infrastructures.
Rising oil prices should concern everyone. They should spur solution providers into action to quickly devise ways of offsetting their customers’ increasing costs with both energy- and money-saving technologies. The continuing energy crisis holds as much opportunity as it does challenges.
Lawrence M. Walsh is vice president and publisher of Channel Insider. Share your energy woes and solutions with him at lawrence.walsh@ziffdavisenterprise.com.