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Energy - Can’t live without it, but how will you afford it?

General Business News

May 2005

Energy - Can’t live without it, but how will you afford it?

When you look back on world history, it’s apparent that the human race would be lost without the availability and practical use of various sources of energy. Excluding internal energy that comes from food, throughout the centuries, new industries have grown from advances in the way we power our world. After all, our ancestors would have found it difficult to power an electron microscope with the fire torches in pre-historic times. Have you ever wondered how long it would take you to go from Los Angeles to New York - in 1880? We don’t have the figures for 1880, but in 1929, a record-breaking journey from New York to Los Angeles established a speed record for the journey - 48 hours. Today you could make the trip in 5-6 hours. Advances in technology, commerce, international relations...well...the advances in almost all areas of human endeavors throughout the years owe their existence to effective use of the various sources of energy.

As a small businessperson, you recognize the vital role of inexpensive fuels in the evolution and growth of your own company. The availability of relatively inexpensive fuels helps you keep prices low, but if transportation costs increase, so will your prices to customers - and you just hung up from a customer complaining about even the current price. If you are a manufacturer, how do you power your equipment and what will fuel costs do to your raw materials? And what about the last time you were at the supermarket? Even if you manufacture shoes, you have to eat and the prices of all those food items depend to some extent on the cost of transportation. It is hard to imagine what, if any, business would not be harmed by high fuel costs.

Your task as the manager of your business is to minimize these costs. Fortunately, there are some available options, but they may or may not be applicable to your business. We thought we might use this month’s article to explore some of those options.

What are the options?

Aside from playing ostrich, you might want to look at the alternative sources of energy available today. The major sources of fuel for most purposes (both currently used or in development) are:
  • Petroleum based fuels (including mixtures with ethanol and methanol)

  • Compressed Natural Gas

  • Electricity (solar cells, windmill, hydro-electric, coal, gas and oil powered generation methods)

  • Hydrogen based fuel cells
Ok, now that you know your options, good luck! Well, you probably don’t know anymore about your options than you did 10 seconds ago. We certainly didn’t, but before we go into detail, let’s discuss some generalities and the first is planning for the future. When California was in the middle of its energy crisis several years ago, some farmers and others converted their irrigation pumps to propane-powered generators. This made sense at the time when electricity was not reliable and it was more expensive than propane. The world has changed since then and the cost of electricity is less than propane. These same farmers are looking to move back to electricity. The lesson is to plan for the long haul. Instead of basing decisions purely on current conditions, do your best to plan for future fuel costs. That is difficult at best, but what is the cost to a factory to be down for an entire day? You would be surprised!

A second principle is to take into account your values and those of the community. Are you just trying to reduce costs or do you want to be greener (environmentally friendly) than your competitors? Your choice of current and future equipment will depend, in part, on what your goals really are. Don’t take environmental implications lightly. In some cases, the greener the fuel, the more efficient it is.

Finally, remember that a major change in your fuel costs will cost money. Make sure you take into account the capital costs of switching to alternative energy sources. In one case, the cost to convert from electricity to propane was approximately $1 million.

With these principles in mind, let’s see how the various fuels affect your expenses.

Petroleum based fuels are the major source of much of our current energy. We use it in cars, backup generators, recreational vehicles, heating homes and factories - the list could go on for pages. Unfortunately, much of our petroleum comes from other countries and the price of oil can swing very high like it is now. Compounding the problem, our refinery capacity has not kept pace with the growth in demand. Every U.S. citizen and business has been negatively affected by current price levels, but how do you control your costs?

From a transportation standpoint, you should start by evaluating your vehicles looking at such things as age, maintenance costs and type of fuel used. Generally, diesel fuels get better fuel efficiency than gasoline. Even though the cost of diesel is higher than gasoline, it’s efficiency makes up for the difference in cost. Another strategy, if you intend on staying petroleum based, is to purchase "hybrid" vehicles where they make sense. Hybrids are combination gasoline/electric vehicles. Hybrids generally cost more than conventional vehicles, but the price differential is partially offset by the availability of the Clean- Fuel Deduction ($2,000 in 2005) and savings from greater fuel efficiency will justify the investment in the long run. Converting to Compressed Natural Gas (CNG) vehicles could also produce savings. While conversions average around $3,000 per vehicle, the savings in fuel efficiency can ultimately pay off for the investment, if CNG pricing is equal to or less than petroleum fuels.

If you use significant amounts of petroleum-based fuels to power your plant or for heating purposes, aside from properly maintaining the equipment using the fuel, you have similar choices as the transportation equipment. You also have additional opportunities for cost reduction by converting to the use of wood burning facilities or facilities that use natural gas. While conversion to natural gas may be inadvisable due to natural gas pricing, the same is not true for wood burning facilities.

The various alternatives have their good and bad points. The potential to help the environment by converting to cleaner burning fuels like natural gas or wood is another consideration. While your prime consideration should always be the effect on your business of changing energy sources, it does not take away from potential savings to acquire the environmental friendly solution. If environmental concerns are high on your priority list, switching to a more energy efficient solution will also help you do your part in maintaining our environment.

As we pointed out earlier, costs of moving from one base of power to another can be expensive. What happens if today’s solution becomes more costly because of a change in the prices of fuel? Should you convert back to the old power plant? If you planned appropriately, you can greatly reduce your costs and maintain flexibility. If at all feasible, you should not scrap the old power or heat generating equipment. Rather, you should maintain it in good order to minimize conversion costs if the situation changes. This minimizes down time and the cost of converting.

We have more people competing for energy today than we have ever had. This will by default increase the cost of fuels and the cost of doing business. Have you thought about the advisability of preparing for the future by investing in alternative fuel use plant and equipment? If not, let us suggest that now might be the time. Give us a call and let us help you in evaluating your alternatives.

Happy May!

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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