- On 22 June OPEC and its allies agreed to raise oil production.
- The aim was to contain the price, which had risen during the first half of the year.
- The oil price cannot be controlled, but a company’s exposure to it can: measure its weight in costs and consider stable supply contracts.
On 22 June 2018, OPEC and its allies agreed to raise oil production in order to contain the price, which had risen during the first half of the year. It was a collective response by the producing countries to a rise that was beginning to show at petrol stations, in transport costs and in the accounts of many companies around the world.
Oil is one of those raw materials whose price seeps into almost everything. One need not be an energy company to be affected: it is enough to move goods, heat premises, make plastics or transport a workforce. That is why the decisions of the big producers, which often seem remote, end up having concrete effects on the budgets of business owners and families in any importing country. Understanding that link helps to interpret energy news better, which is often read as other people’s business.
Why oil matters
Oil is a cost for almost every economic activity: transport, industry, agriculture, energy. When its price rises, the effect spreads to fuels, logistics costs and, finally, to the prices consumers pay.
That spread is neither immediate nor uniform. Some costs react within days, such as fuels; others take months, such as transport rates agreed with customers or the prices of products with a large energy content. That explains why a rise in crude can be felt with a delay and why, conversely, a fall is slow to reach the bills of companies and individuals. This inertia means it is better to look at the trend over several months than to react to a single figure.
Controlling supply
OPEC and its allies can influence the price by deciding how much they produce. Raising output increases supply and tends to moderate the price; cutting it has the opposite effect. It is a collective mechanism subject to negotiation and to differing interests among its members.
That each country has different needs complicates any agreement. Some prefer high prices to finance their budgets; others fear that an excessive price will speed up the search for alternatives or encourage other producers to increase their supply. That is why the organisation’s meetings are followed so closely and why its decisions, even when announced, may need later adjustments if circumstances change. For anyone dependent on the price of crude, that uncertainty is part of the scenario.
Energy costs in the business
For a company with significant energy or transport spending, such a variable crude price suggests measuring how much it weighs in its cost structure and how it feeds into its prices. Considering supply contracts with stable terms and improving efficiency are useful decisions whatever the market does. Efficiency is one of the few variables that lie entirely in the company’s hands.
A practical first step is to go through last year’s invoices and separate spending on fuel, electricity, gas and subcontracted transport, to see what share of total cost each represents. From there, measures such as optimising routes, replacing inefficient equipment or negotiating rates with suppliers can be studied. Anything that reduces consumption protects the margin against any movement in the price. And if the energy bill is very large, an adviser can help assess whether there are alternative sources of supply or financing for improving efficiency.
The oil price cannot be controlled, but a company’s exposure to it can.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
