The Organisation of Petroleum Exporting Countries (Opec) has rejected pleas from US President Donald Trump to increase oil production, sending prices soaring to a four-year high.
The group of 15 countries effectively control the price of worldwide crude oil by either slowing or accelerating production, which is made possible by the fact they possess more than 80 per cent of the world’s reserves
The market has reacted to the USA reiterating its intention to impose trade sanctions on IR Iran, one of Opec’s key members, which has resulted in the Iranians reducing production and raising the price of Opec basket oil.
The price of Brent Crude, which tracks slightly higher than Opec, has today reached $82 a barrel , sparking fears that current trends could increase it further by as much as 20 per cent in 2019.
What does the oil price rise mean for my business?
Crude oil is a key component in many consumable products, including petrol and diesel, natural gas, solvents, kerosene, lubricants, asphalt and more.
Many of these are used by businesses for:
- Fleet fuel
- Machinery and manufacturing
- Building and construction
- Energy generation itself
If the prices of these increase substantially, they will obviously have an impact on businesses’ bottom lines and their procurement strategies. Many of these are essential costs in the running of businesses and must be absorbed, often diminishing investment in other areas. Therefore, higher oil prices could conceivably slow economy growth. This would represent bad news for the UK government, who are implementing a range of measures to re-invigorate it.
Sterling versus the Dollar
The above effect is magnified by Stirling’s weakened state against the US Dollar (currently £1 = $1.32), in which worldwide oil is priced, meaning UK companies are worse off than they would have been pre-Brexit and pre-2008 financial crash.
We briefly covered this in our 2016 blog on the 14-year oil price low, “Oil Prices Explained For Businesses”. As mentioned above, petroleum and diesel are made from crude oil.
All fleet managers and procurement managers should track fuel prices anyway, but they’ve been particularly vilified in the second half of 2018, shouldering the blame for increasing the UK’s rate of inflation in August.
The largest component of the actual price of fuel is controlled by the government. The UK “Fuel Duty”, which generates just under £28 billion per year, makes up around 44 per cent of the price at the pump (based on average UK petrol price of 131p per litre). It would be interesting to see whether the government would be able to reduce this to ease the burden imposed by rising wholesale prices.
Certainly in the short-term, the prices of your petroleum expenditure should increase in response to the oil price rise. But, such is the sensitivity of the market to political and environmental factors, the best long-term strategy is to keep a close watch on the relationship between Opec members and the USA, as well as the noises being made by UK fuel retailers.
Oil only accounts for a very small part of the UK’s electricity generation; less than 2.9 per cent in 2017 (Dept. for Business, Energy & Industrial Strategy, 2018).
So, its rising price should have a limited impact on how much buying UK energy costs directly. Unfortunately, the picture is rarely this simple and is affected by many indirect factors. The rising price of oil also impacts the suppliers, District Network Operators (DNOs) and other organisations involved in physically delivering energy. They are then able to pass these increases on as part of the “non-commodity” elements in their billing.
The UK has been a net importer of electricity since 2004, meaning that we are also subject to price changes and tariffs imposed by other countries who hold the cards in this area. As with seemingly everything, Brexit will have an impact on energy import. Fewer trade deals in place with Europe could feasibly result in higher import costs. As if you weren’t already watching this area like a hawk, the long-term relationship we foster with The Netherlands, France and the Republic of Ireland, who are three of our biggest electricity suppliers, will be key.
Clearly, crude oil has a significant impact on commercial life in the UK, particularly in businesses with fleets and large energy users. But its position as a critical global commodity stretches beyond its immediate uses and shapes the geopolitical stances of the world’s superpowers.
It would be irresponsible to claim for definite the impact Brexit would have on the UK’s relationship with oil and energy, but it is undoubtedly an area that needs careful monitoring as March 2019 draws closer.
If you’d like some help preparing for the price uncertainty of 2019 and beyond, get in touch today for a no-obligation chat about how to protect your business’ energy interests and produce accurate cost projections for the coming years.