- On 5 September Saudi Arabia announced it would extend its voluntary cut of a million barrels a day until year-end.
- Brent, the European crude benchmark, rose above 90 dollars.
- Dearer energy slows the fall in inflation: it is worth keeping budgets with a margin for energy and transport.
On 5 September 2023 Saudi Arabia announced it would extend until year-end its voluntary cut of a million barrels a day. Brent rose above 90 dollars. With demand holding up, the lower supply pushed the price upwards just when many were expecting relief.
The decision mattered because oil is present, directly or indirectly, in almost all economic activity. A higher price feeds through to fuel, transport, plastics and a long list of goods. That is why the decisions of a handful of large producers end up reaching the accounts of companies and households all over the world. The decision was read as a signal that the large producers wanted to support prices, which reinforced the upward pressure.
What Riyadh announced
Riyadh decided to keep withdrawing a million barrels a day from the market until year-end, and less supply against firm demand pushes prices up, which is why Brent, the European crude benchmark, moved above 90 dollars.
The Brent benchmark is the price of a specific type of crude used as an indicator in much of the world, especially in Europe. When oil is said to rise or fall, it often refers to that price. Supply contracts, fuels and many tariffs are indexed, directly or indirectly, to its swings. Voluntary cuts depend on each country’s discipline and on how demand evolves, so their real effect can vary over time. Markets watch both the statements and the actual production figures.
Just when inflation seemed under control
Energy was becoming dearer again just when inflation seemed under control. Oil influences the price of fuel, transport and, indirectly, nearly all goods. An energy rebound can slow the fall in headline inflation even if other components are improving.
It is a familiar mechanism: energy costs are built into the production and distribution chain and end up in the final price with some delay. That is why a jump in crude in September can show in consumer prices over the following months, delaying the moment when central banks feel comfortable changing course. Inflation that resists falling obliges central banks to keep up the pressure on credit, which in turn affects mortgages, business loans and investment, in a chain that begins with the price of a barrel. That is why a rebound in crude is not just an energy-sector matter: it has effects on interest rates, consumer confidence and the hiring and investment decisions of many companies.
The last mile
For central banks, and for any company, it was a reminder that the last mile of inflation is the hardest. Bringing prices down in the final stretch at the desired pace is harder than bringing them down from a peak. Every component that resists adds time to the process.
For companies, it is worth keeping budgets with a margin on energy and transport lines, and not taking a lower-cost scenario for granted. It may also be useful to check whether supply and transport contracts include review clauses and how they are updated, and what part of the cost can be passed on to the customer without losing competitiveness. A useful practice is to review how sensitive results are to fuel prices: how much the year’s margin would change if fuel were ten per cent dearer than budgeted, and what measures would cushion the impact.
Costs that depend on a volatile market are better budgeted with prudence than with optimism.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
