Over the past six months the price of oil has steadily risen to its current price of approximately $110 per barrel. Many questions have arisen related to these increasing costs, including what impact the Middle East conflicts will have on oil prices for the remainder of 2011 and 2012, and whether or not oil prices will affect the current economic recovery.
A recent Wall Street Journal poll of CFOs indicated that oil prices were their most significant concern for the U.S. economy, and about half of those polled said oil prices were the biggest concern for their companies. Due to the increase in these costs for the first quarter of 2011, CFOs are reducing their prospects for profit growth this year.
Companies need to be creative in reducing costs either through operations or through energy-efficient means that can offset rising energy costs. These costs will be magnified for companies that are in energy-intensive environments or that use petroleum-based raw materials (i.e., plastics manufacturers and injection molding companies).
Companies should look for opportunities to lock in fuel prices through the purchase of energy hedges for fuel or various raw material costs to ensure that market fluctuations are neutralized as much as possible. Hedge contracts allow companies to lock in fuel/commodity prices at a specific price point. This will enable companies to reduce the volatility of energy prices and provide opportunities to improve operational management and cash flow.
Another option is to take advantage of energy-efficient tax credits or incentives, such as federal Section 179D deductions or other similar state grants or credits to help offset rising energy costs. Provided is a link to energy tax incentives in various states that might be applicable to your situation. These incentives might provide your company an opportunity to offset rising energy costs.
For further information, please contact George Adams.
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Schneider Downs provides accounting, tax, wealth management, technology and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA and Columbus, OH.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.