- On 4 March, OPEC+ decided, against market expectations, to keep its production cuts almost intact.
- By limiting supply just as demand was picking up, the price of crude rose sharply.
- Energy was getting dearer just as the economy reopened: it is worth measuring how much it weighs in each business’s costs.
On 4 March 2021, OPEC+ decided to keep its oil production cuts almost intact, against market expectations. The decision came as a surprise because it was taken for granted that the group would open the taps somewhat as the economy reactivated. Instead, it opted for caution, and the price of crude rose sharply within hours.
For anyone who does not follow the sector, it may seem distant news. It is not: oil is a raw material present, directly or indirectly, in almost everything that is produced, transported or consumed. When its price rises, the bill ends up shared between companies and households, and the timing, just as the economy was starting to reopen, did not go unnoticed. Companies with high energy consumption know that every sharp move in crude eventually shows up in their profit and loss account.
Who decides how much oil comes out
OPEC+ brings together the OPEC producer countries and other allies, and coordinates how much oil reaches the market. By keeping its cuts almost intact, against market expectations, it limited supply just as demand was beginning to pick up. The result was a notable rise in the price of crude, a clear example of how a political and commercial decision turns into prices within hours.
The mechanism is simple: when supply is restricted and demand recovers, the price responds quickly. It is a logic that repeats in almost any commodity market, but in oil it has a particularity: a few heavyweight players can decide, in a coordinated way, how much they produce, and that gives them direct influence over a price on which a good part of the world economy depends. That is why every meeting of the group is watched closely and its decisions can move the markets before any measure has even been applied.
From the petrol pump to the shopping basket
Energy was getting more expensive just as the economy reopened. For companies intensive in transport or energy, a cycle of rising costs was beginning that would last more than a year. Fuel affects the cost of moving goods, producing and supplying, so the effect spreads to almost any chain.
For families, the most visible channel is fuel and the energy bill, but there are less obvious ones: the transport of food, plastics, fertilisers or freight rates. The price of energy rarely stays within the energy sector, and its effects work their way into final prices with a certain delay. Sectors with tight margins are the first forced to decide whether to absorb the increase or pass it on to their customers.
Measuring your exposure
It is worth measuring how much energy weighs in each business’s costs, reviewing contracts with suppliers and customers to see whether they allow increases to be passed on, and studying efficiency measures. When contracts are at a fixed price, the seller absorbs the rise; when they can be revised, it is shared. Knowing which of the two situations each line of business is in avoids surprises. It is worth putting these calculations in writing so they can be updated when prices change.
It also helps to talk to the bank and advisers about how a prolonged period of high costs would affect cash flow. The point is not to guess where oil will go, but to know how much margin is left if the cost of producing or transporting rises on a sustained basis and what levers exist to offset it. Examples include adjusting prices, renegotiating with suppliers, optimising routes or reviewing the purchasing calendar.
Whoever knows their exposure to energy decides with more room to manoeuvre.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
