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CEG Industry Blog

Crude Oil Ups and Downs Have Everyone Guessing

The volatility of this spring’s oil pricing surely has general contractors and their estimators sweating.

Mon April 20, 2015 - National Edition
Giles Lambertson

Job estimators earn their pay by gazing into crystal balls and seeing clearly what is obscure to the rest of us—for instance, the price of crude oil three months from now. The price either will rise, raising costs with it, or it will fall, reducing overhead. A project’s profit-loss outcome can hinge on knowing which will occur, not that estimators feel any pressure or anything.

The volatility of this spring’s oil pricing surely has general contractors and their estimators sweating. Consider some of the moving targets they are trying to target:

• After the price of crude fell precipitously (44% in the last few months of 2014), the price of asphalt continued to rise. However, it is expected to fall in months to come—or, perhaps, rise if oil prices climb again, which they did last week.

• If crude oil prices rise appreciably, so will the price of gas, diesel and oil products. Does a bidder contractually stipulate a surcharge to offset rising oil prices and perhaps jeopardize a project bid, or does it cross fingers and hope to be able to absorb any rising cost?

• Is the situation risky enough for contractors to consider re-opening their supplier contracts, thereby reducing pressure on the back end of their bids?

Highway construction is famously affected by rising crude oil pricing, but every builder is vulnerable to oil costing driven by commodity traders bidding on oil futures contracts. With oil pricing again caught in a geopolitical crossfire, contractors can’t know where the bidding will go. They only know that the cost of everything from PVC and lumber to asphalt materials and fuel depends on the outcome.

Do they hunker down to see what will happen? Or do they double down on best-guest estimates? Do they see the March falloff in construction employment as a mere lull—or a dire portent? These are the times that try crystal ball-gazers.