Oil and Gas Prices, and How Firms Chapter

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¶ … oil and gas prices, and how firms communication strategies are affected by these. In many industries, there will be discussion of impacts when fuel prices change rapidly. The recent decline in oil prices, and the responses by the industries that are most strongly affected by this change highlight a few different communications response.

An example is used where one airline has pocketed the lower costs, and focused this announcement on the business media where shareholders will applaud the move. Another airline, by contrast, is lowering prices thus passing the savings along to customers. This was announced through the mainstream and travel media foremost. In both instances the news was released mainly to the most sympathetic media, and coverage of the issue was therefore focused away from audiences that might react negatively to it.

Companies can also, in their communication, shift the time-framing of something like oil price changes. If it is to the advantage of a company that consumers should see something as long-term, that is the message. Automakers are seeking to convince consumers that the low prices are here to stay, or at least will stay long enough to justify the purchase of an expensive (read: high margin) vehicle. Tesla, on the other hand, is seeking to minimize the downside of persistent low oil prices, either by downplaying their relevance or by arguing that the oil price dip is temporary.

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Conclusions are thus drawn about how corporate communications respond to external stimulus, and what the implications of this are. Strategy can change, and it is the role of business communication to massage the message to suit the needs of the company and the intended audience.


Chapter on Oil and Gas Prices, and How Firms Assignment

In November of 2014, OPEC -- or more specifically Saudi Arabia - announced that it would not cut its production in order to offset the increase in production in the U.S., Canada and other countries due to fracking. This announcement sent the price of oil downward, even more than it had already gone. Since its inception, OPEC sought to manage the global supply of oil to the benefit of its member, and it did this by managing its own production level, since OPEC producers control enough of the world market to do that. Their move this time, however, is an attempt to regain their market power. Fracking, and the Canadian oil sands, are expensive forms of oil, and OPEC deals in cheap oil. The cartel's move, therefore, was to lower the price of oil over the long-term, so that Western nations would shut down their more expensive production in favor of cheaper OPEC-brand oil (Lawler, Sheppard & Gamal, 2014). Oil prices have always been volatile, and when they spike or collapse there are going to be impacts on business. This paper will discuss the impacts of the changes in oil and gas prices, in particular recently, on business.

Short-Run Effects

In the short run, most businesses enjoy lower oil prices. The majority of oil consumption comes with very low price elasticity of demand, as it has a multitude of uses and few substitutes (Economics Online, 2015). There may be a short-term boost in the demand for oil as well, as some buyers may choose to consume more when prices are low, bringing a little bit of discretionary buying back to the market. What firms do not do often, however, is pass short-run savings onto their customers. Prices are sticky, and as a result profits increase when prices remain high while costs decline. Consumers also benefit, and they may either spend their extra money or save it, a choice that usually depends on their confidence levels.

One of the challenges in the short run for businesses is when they have to justify their pricing to their customers. After a prolonged period of oil price declines, businesses will often have to face questions about their pricing. This is especially true of businesses with where oil prices are obviously a major part of their cost structure -- gas stations are the first to hear about prices, but airlines and logistics firms will soon face the same. In many cases, airlines seek to resist lowering their fares to match up with the drop in fuel prices. Some airlines may have locked in their fuel prices, and in other cases there may even be tacit collusion to wait as long as possible before responding. For a business, there are really two approaches to communication.

For the most part, a company that does not want to lower its prices right away will not engage with the public in a meaningful way regarding oil prices. They will not talk about their cost savings. Eventually, however that communication will have to take place, especially if the company is publicly-traded. The communications that surround quarterly earnings are typically utilized in such a situation because the audience will applaud the cost savings when they increase profits. American Airlines, for example, announced that the falling oil prices would allow it to save $5 billion, and did so for an audience of investors, touting the financial benefits of the oil price decline, and offering that it might deliver an extra dividend to shareholders if it continued to earn surplus profits (Gara, 2015). An extra $5 billion in profits, of course, is $5 billion that passengers are paying in excess of what they could be under conditions of perfect competition. There was no communication with passengers -- the audience was kept to the business audience -- and that would reduce the demand from the passengers to see lower fares resulting from the oil price declines. The information is technically in the public, but the business media is not the same thing as the mainstream media and it is an audience that is more favorable to this particular message.

If the company intends to lower its prices in response to the lower oil prices, then it would direct its communications to the consumer. This occurred in Australia, where two major airlines were compelled by competition to lower prices on major routes like Sydney-LAX and Sydney-London (Paris, 2015). This information was released through the travel media, for the mass audience. Again, the travel media is the most favorable venue for releasing information about lower fares -- the business media might prefer these companies keep the extra money in profits the way American Airlines did.

Long-Run Effects

The long-run effects of a decline in oil and gas prices are different. In the long-run, consumers will change their buying habits, and that has implications for strategy, not just tactics. Automakers may, for example, switch to smaller cars, or electric cars. This involves changes in design and production priorities. Already, there is evidence that automakers are selling more of their pickups and other large passenger vehicles (Vorano, 2015). Communications becomes more of a marketing effort when a company wants to exploit shifts in oil and gas prices. Traditional automakers will point out that larger vehicles have better fuel efficiency than they used to, encouraging buyers to see the oil price drop as a long-term trend, even when everybody knows we are running out of oil. Tesla, on the other hand, diminishes the effect of lower taxes, noting that it is already selling all the vehicles it can make, so gas prices do not really matter, at least right now (Tesla, 2015).

The strategy of diminishing negative news has also been utilized by some airlines, at least ones that prefer to avoid cutting prices so that they can enjoy a few months of easy profits. Topham (2015) points out that a common narrative coming from the communications departments of many airlines emphasizes that they hedge fuel prices, imploring the consumer to stop thinking that there is a connection between lower oil prices and lower flight prices. They wish to disassociate these two things, even though there is a relatively strong connection.

When oil prices were increasing rapidly, as in the first half of 2008, it was the opposite. Most companies could not wait to tell people about their struggles, and ensure that consumers were ready for higher prices. This is also an interesting point of communications strategy. If oil prices increase rapidly, communications departments needs to prep their audience for the bad news about higher prices. A strategy that was used by many firms was the introduction of the fuel surcharge. This allows for the extra payment to be demanded without classing it as a permanent increase. Variable costs, especially their most volatile components, were being passed onto customers in a way that normal price increases could not be. The result was the institution of pricing flexibility, simply by framing the price increase as something over which the company has no control.

Business Communication

The basic framing of oil price changes is that they are out of the company's control. This is not always entirely true -- airlines usually hedge prices and certainly oil companies have control over their cost structures. But the approach helps when communicating bad news to… [END OF PREVIEW] . . . READ MORE

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