Analysis of firm performance in presence of oil price shocks: Importance of skilled management

Abstract

This paper adopts an innovative technique to separate the impacts of fuel shocks on supply, customer needs, and inventory needs which reveals that the competence of managers have a significant but fluctuating effect on business performance under such circumstances. Manufacturing firms can reap maximum benefits from employing high-ability managers during oil shocks. Managers with exceptional skills exhibit remarkable outcomes in the energy, agricultural, forestry, fishing, and service industries, especially when unfavorable economic consequences accompany oil supply shocks. On the other hand, capable managers fall short in the energy, mining, building, retail, and service sectors during fuel usage need shocks representative of financial expansion. The connection between significant outperformance and underperformance during fuel supply and need shocks is linked to energy companies that have high-ability managers. To protect against fuel value declines, these astute managers will likely employ more aggressive hedging plans to mitigate economic stress or limit profit volatility. Similarly, experienced managers in other sectors may also take measures against the volatility of oil prices by diversifying their supply or using derivatives. Notably, fuel consumption demand shocks are more expensive than supply shocks and vice versa.