Easing oil prices tame demand for green products

By Scott Malone

NEW YORK (Reuters) - Having changed its tune on global warming, Corporate America is increasingly banging the green drum of energy efficiency. But with oil prices easing off last summer's record high near $80 a barrel, some executives say customers' ardor for power-saving equipment has eased.

"Most businesses won't invest unless something is a two-year payback or less on smaller products. It's just the way they look at stuff," said David Cote, chairman and chief executive of Honeywell International Inc. (HON.N: Quote, Profile, Research, Stock Buzz), speaking at the Reuters Manufacturing Summit in New York.

"When oil was around $25 to $30 a barrel, payback on energy efficiency products was generally six to seven years. And when it got to $60, $70 a barrel, payback was in the three- to three-and-a-half year range and significantly better, but still when bumped up against a lot of other things, not enough to push people over," Cote said. "At $50 to $60, still good, still a better return than it was, but it's still not a return where it hits everybody's screen and everybody is clamoring for it."

U.S. oil futures CLc1 were trading around $61 a barrel on Thursday, well off their July peak above $78.

That easing in prices has meant that energy conservation has fallen off the list of some CEOs' top concerns.

"We as companies respond to what is causing the biggest problem," said Herb Henkel, chief executive at Ingersoll-Rand Co. Ltd. (IR.N: Quote, Profile, Research, Stock Buzz) "We're always built to focus in on that which is the burning problem at the time you're dealing with it. I think that's human nature."

Still, companies are not completely ignoring the issue. Last month a group of 100 major corporations, international organizations called on governments for urgent action against global warming.

Caused by the release of greenhouse gases into the atmosphere, a byproduct of the burning of fossil fuels like oil, the documented rise in world temperatures is linked to more severe storms, worse droughts and rising seas.

Corporations, including General Electric Co. (GE.N: Quote, Profile, Research, Stock Buzz), Citigroup (C.N: Quote, Profile, Research, Stock Buzz) and DuPont(DD.N: Quote, Profile, Research, Stock Buzz), signed an accord calling on governments to attach a price to greenhouse gas emissions.

LOW HURDLE RATE

Some executives at the summit pointed out that even with oil prices -- which influence everything from the cost of powering factories to the prices of many chemicals -- off record highs, they are still well above their trend level of recent years. For much of 2003, oil traded below $30 a barrel, less than half its current level.

"Most of our customers use a hurdle rate that's a lot lower than $50 a barrel to make their economic decisions, their investment decisions. A lot lower, like maybe $20 a barrel lower." said John Rice, president and CEO of GE Infrastructure. "It would depend on who but there is a pretty big gap between today's price for a barrel of oil and the number that's used in the risk calculation of the companies we do business with."

GE aims to generate about $20 billion in annual revenue by 2010 through sales of energy-saving products such as wind turbines and more efficient locomotives, under its "Ecomagination" program. Last year the conglomerate sold $12 billion of such products.

Other executives agreed that while it is easier to sell energy-efficient products when energy prices are higher, there is still demand if they can show concrete benefits.

"We are finding that there is a large drum beating for green and it is driving a lot of innovation," said Dennis Sadlowski, chief operating officer of U.S. energy and automation at Siemens AG (SIEGn.DE: Quote, Profile, Research, Stock Buzz).  Continued...