Energy Costs Can Change the Equipment Investment Equation
Escalating conflict around two of the world’s most important energy corridors is putting renewed pressure on oil supplies and transportation costs.
Recent fighting in Yemen has increased concerns surrounding the Bab el-Mandeb Strait, the narrow shipping route connecting the Red Sea with the Gulf of Aden. At the same time, disruptions around the Strait of Hormuz have already sharply reduced oil flows through another critical Middle Eastern shipping corridor.
The result is a more complicated energy environment for businesses far removed from the conflict itself.
Higher energy prices don’t simply increase operating expenses. In some industries, they can change the financial case for investing in equipment.
Energy Costs Reach Across Industries
Transportation companies experience higher fuel prices directly, but the effects can extend much further.
Manufacturers pay to transport raw materials and finished goods. Construction companies operate fuel-intensive machinery. Distributors depend on trucking and logistics networks. Agricultural businesses operate equipment while also moving products over significant distances.
Disruptions to major shipping routes can add another layer of expense. When vessels avoid strategic chokepoints and take longer routes, additional fuel, transportation and insurance costs can work their way through supply chains.
The U.S. Energy Information Administration has previously found that disruptions in the Red Sea increased both shipping times and freight rates as vessels diverted around Africa.
That means an energy shock can affect a business through several channels at once.
Efficiency Becomes Part of the Investment Calculation
Rising operating expenses might initially encourage companies to delay capital expenditures and preserve cash.
But the opposite can also be true.
When fuel or energy becomes more expensive, the potential savings from replacing inefficient equipment can become more meaningful. A newer truck that consumes less fuel, a manufacturing system that uses less electricity or machinery that produces more output per operating hour may generate greater savings when input costs are elevated.
The same principle applies to equipment that reduces downtime or improves productivity.
For finance leaders, that means the purchase price shouldn’t be considered in isolation. The more useful comparison is often between the total cost of continuing to operate existing equipment and the total cost of replacing it.
Higher operating costs can shift that calculation.
Preserve Capital While Addressing Operating Costs
The challenge is that periods of rising energy and transportation costs can also put pressure on cash flow.
Businesses may therefore find themselves needing to invest in more efficient equipment at precisely the time they are most reluctant to make a large cash expenditure.
Equipment financing can provide another option. By spreading the acquisition cost over time, a company can put new equipment into operation while retaining capital for fuel, payroll, inventory and other operating requirements.
That doesn’t mean every increase in energy prices should trigger an equipment purchase. The expected savings still need to justify the cost of the investment.
But it does mean that equipment decisions should be reconsidered as the economics surrounding them change.
Geopolitical events may be impossible for businesses to predict. Their own operating economics are much easier to measure.
For finance leaders, the important question is whether changing energy costs have changed the value that newer, more productive equipment could provide.
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Disclaimer: This article is provided for general informational and educational purposes only. It may reference or incorporate information reported by third-party news organizations, financial publications, industry sources, and other publicly available sources. Fidelity Capital Partners, LLC does not independently verify all third-party information referenced, and such information may be incomplete, subject to revision, or change over time. Any analysis or commentary provided by Fidelity Capital Partners, LLC reflects our interpretation of the information available at the time of publication, including its potential relevance to equipment financing, leasing, capital planning, and related business decisions. Nothing in this article constitutes financial, legal, tax, investment, or other professional advice, nor does it constitute an offer or commitment to provide financing.
