Oil prices

Why so crude? Oil prices explained for businesses

​We see it on a weekly basis in the news – the price of crude oil has risen or fallen. Despite the continual increase in the cost of living in the UK, the cost of oil genuinely fluctuates.  Indeed, it hit a 14 year low at the start of 2016.​

So why does this not equal the cheapest energy bills or fuel prices we’ve seen for more than a decade?

This is a simple enough question with quite a complex answer.  The short version would cite the extra contributors to the price you pay for your energy as a business or consumer. The cost of transporting energy, maintenance of infrastructure, updating of technology, staffing and taxes makes up at least half of the price you’ll pay.  It’s estimated that the wholesale component only makes up only 40%-50% of the cost of energy to the end user.

All of these factors are affected on an annual basis by inflation, which itself is expected to make a significant leap this year, pushing the cost of living up further.

Considering the added depreciation of the Pound against the Dollar, in which barrels of oil are priced, 2017 is shaping up to be a lot more expensive.

Who’s in charge of the price?
The Organisation of Petroleum Exporting Countries (OPEC) is a group of 10 of the highest exporters of oil in the world.  It is made up mainly of middle eastern countries, where 56% of the Earth’s oil reserves are based.

They control the amount of oil available to buy on the market and hence how valuable it is.  The 14 year low at the start of 2016 was caused by OPEC’s desire to hold onto their market share in the face of rapidly increasing USA production.  This flooded the market with extra available oil, lowering the price significantly.

The UK became a net importer of oil in 2005 and has remained so since after North Sea reserves began to deplete.

Your business
Although the cost of oil, gas and electricity have indirect effects on each other, they don’t officially track in the UK.  Under 2% of the electricity generated in the UK is from oil-based power plants (find out more here), despite 36% of the fuel imported into the country being oil.  The rest is used for other purposes, including transport.

If your business has a fleet, the price of crude oil is worth keeping a close eye on.  It has been predicted this week that the price at the pump will breach the 120p mark and could increase by a further 3p as OPEC’s deal with non OPEC producers this week marked the start of an oil price increase (see here for more details.)

As specified above, oil is responsible for less than 2% of electricity production in the UK.  So the impact on electricity prices in theory shouldn’t be extreme.  Gas is responsible for 28.9% of production in the UK and hence the price of gas has more of an impact on the price of electricity than oil does.  The rest of the UK’s electricity generation is made up of coal, nuclear, imports, hydro, wind, solar and other renewables.

Gas prices are also on the rise, based on factors of its own, including physical ones such as the weather; the need for heating; and storage capacity.  The price of oil can also be a factor in longer term contracts, which try to predict the price of other commodities into the future.  Another key factor at the moment is the currency oil is priced in – a real negative for the UK following the post-Brexit Pound depreciation.

There are so many elements to consider within the minefield of crude oil alone, it’s always handy to have an expert on hand to help you navigate it. For help planning your energy bills into the coming years of uncertainty, give us a call at Great Annual Savings Group.

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Paul JohnsonGroup Financial Director

Paul Johnson is very much a home-grown talent.

He joined Great Annual Savings Group in its infancy, fresh from a youth career as a professional footballer with Hartlepool United.  He quickly established a reputation within the business and aced all required accountancy qualifications in the space of four years to become the Group’s Management Accountant.

Several successful projects later, Paul was promoted to Head of Finance.  When the former FD left GAS, he took on the mantle of the business’ most senior finance professional; boasting a string of incredible achievements all under the age of 30.

Quote:

“I have witnessed phenomenal growth at the Group over the many years I’ve worked here and I’m looking forward to guiding the Group into an exciting new chapter.”

Interesting fact:

Paul made his professional debut for Hartlepool United against Bournemouth in the Football League.  Some say Danny Ings still resides in his pocket to this day.