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Why does this brewer want higher oil prices?

Heineken Chief Executive Jean-Francois van Boxmeer has told MSM Money that he is “praying for higher oil prices”.  But why should a brewery – albeit the third largest in the world – desire an increase in the price of a commodity that appears to have little to do with its business?.. and is this evidence that van Boxmeer has been imbibing a little too much of his company’s produce?

The answer is that the company had been expanding its sales into oil producing states in Africa, the Middle East and Eastern Europe.  Sales in Nigeria, for example, had risen for 11 years before the crash in oil prices caused economic and social turmoil.

Although the company’s sales in Europe and Asia were stable, there is little scope for further growth in these already saturated markets.  To continue growing the company needs to expand into less developed regions; and until recently, countries with oil had proved to be an important market.

This said, van Boxmeer should be careful what he wishes for.  For the best part of a decade, oil prices have been volatile; swinging from highs over $100 per barrel to lows below $40.  It is unlikely that the next price spike is going to be any different.  A lack of investment means that for more than two years the oil industry has failed to replace its reserves – the world is now burning more oil than will be available 5 to 10 years from now.  So a spike above $100 per barrel in the near future is to be expected.

This presents two problems for a company like Heineken.  First, the company’s own costs of doing business will increase with the price of oil.  The ingredients – which are grown using the techniques industrial agriculture – will be more expensive to produce and transport.  The energy used in the brewing process will increase (as all energy prices tend to follow oil’s trend).  And transporting the end product to market will add to the cost.  Put simply, expensive oil equals expensive beer.

Second, oil prices above $100 tend to trigger recessions.  The cost of living increases, and consumers have less disposable cash to spend.  While consumers may continue to spend on essentials like housing and food, they will be less likely to spend on luxury items like lager.  It only takes each of us to have one less night out in a month for sales in that all important Asian/European core market to collapse.

Nor is there any guarantee that higher oil prices would translate into increased sales in Nigeria and Russia.  If the higher prices crash demand in the developed countries, Nigeria and Russia may simply find themselves sat on oil that nobody can afford to buy.  In such circumstances, much as people may feel like turning to drink, they may not be able to afford it.

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