“Trying to forecast oil demand, supply and price in today’s market is like trying to paint the wings of an aeroplane in flight. Even if one succeeds in covering the subject, it’s unlikely to be a tidy job.”

Howard Kauffmann, then president of Exxon, was speaking in 1982, as the price of crude declined from its post-oil-shock high, but his comments may as well apply today, with prices weak and pundits who warned of ‘peak oil’ a year or two ago fretting instead about ‘peak demand’.

Oil majors are price takers: the level at which they sell their product is largely dictated by the market. Not surprisingly, when the price falls, they have to adjust other costs. BP last week heralded big cuts and job losses; ConocoPhillips said it would reduce capital spending by a fifth in 2015.

But what about the price makers, the companies for whom oil is one of many raw materials for their product? Their management challenge is more complex.

Despite the efforts of economists to boil the pricing question down to essentials (Alfred Marshall famously used a fish market to illustrate ‘perfect’ competition), and centuries of experience, even large companies sometimes seem to flounder.

One reason is that organisations flout the Kauffmann Principle by switching to autopilot and ignoring any risk of turbulence ahead. After a long period of commodity stability in the 1990s, some managers simply forgot how to adjust the paint-pots in flight, according to one former executive at a multinational. They had lapsed into a complacent view that the cost of commodities was predictable, projected prices accordingly, and duly suffered when raw material prices misbehaved.

The recession and online competition have pushed pricing to the top of the board’s agenda at many retail businesses. But AlixPartners reckons fewer than half of companies put price analysis and negotiation in the hands of a dedicated senior team

The textbook answer to the question of how to smooth commodity volatility is to hedge. But hedging can be a dangerous game if it is not your core activity. In 2012, Delta Air Lines actually bought a refinery near Philadelphia as part of its effort to manage fuel prices. The decision perplexed analysts, one of whom said it was ‘like a rabbi buying a church’. Glory be, Delta said last week that, partly as a result of its unorthodox strategy, it expected lower fuel prices to yield an annual net cost benefit of $1.7bn. But some critics still believe the refinery gambit — launched when oil was costly — will not work as well now that crude prices are weakening.

At least Delta is trying. Francesco Barosi of AlixPartners, the consultancy, says most companies ‘instead of looking ahead, are looking back’. Very few are good at both tactical pricing, which depends on managing existing contracts and orders, and strategic pricing, which involves keeping an eye on the horizon. Most ignore even valuable internal information from customers and suppliers that could allow them to anticipate volatility and be less reactive.

Knowledge of the consequences of a shift in raw material costs remains patchy. Some companies examine only the potential impact on their top three products; some look at their whole portfolio; some remain in the dark. The recession and online competition have pushed pricing to the top of the board’s agenda at retail businesses, according to one chief financial officer. But AlixPartners reckons fewer than half of companies put price analysis and negotiation in the hands of a dedicated senior team.

Such lapses are surprising, given that pricing the product properly is one of the basic imperatives of business. One of the great pleasures of watching The Apprentice is seeing how novices mess it up. In one recent episode of the UK version, the teams competed to create candles (which in their commercial form depend, as it happens, on paraffin wax, an oil by-product). To call their pricing strategies naive would be a gross understatement. In the end, the candidates with the better product were trounced because their opponents, despite having made various moronic errors, had used cheaper ingredients and sold their candles at a higher margin.

Some manufacturers will get lucky as the cost of crude oil falls. They may be able to hold prices and bank a higher margin. Congratulations if that decision was thought through. If, however, you did not know, let alone anticipate, how that windfall occurred, you deserve to be ranked with the blunderers on The Apprentice: you are neither price taker, nor price maker, but a price faker, whose bluff will eventually, and expensively, get called.

andrew.hill@ft.com

Published in Dawn, Economic & Business, December 22th , 2014