Introduction
Oil is a cornerstone of the developing world. Since the mid 1950s oil has cemented itself as the most important source of energy trickling down from industrial to residential application. Oil offers the world 33% of all energy and is the world’s primary source of fuel.
While some nations act as natural hubs for the resource, developed countries having exhausted their own reserves look to importation; primarily from Russia, Saudi Arabia, the United States, China and Canada.
To balance the fair distribution of resources the Organization of the Petroleum Exporting Countries (OPEC) became a permanent member of the intergovernmental organization in the 1960s.
With members coming in and out, the current panel consists of Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Libya, UAE, Algeria, Nigeria, Ecuador, Angola, Gabon, Equatorial Guinea and Congo.
With the prevailing global pandemic every aspect of day to day life has seen change and adaptation. The pandemic had serious side effects on the global economy and the energy sector. As a result, most nations were forced into remedial measures in order to prevent further spread and to slowly counteract the effects.
The oil market in particular saw witnessed serious hardships. While more employees were facing redundancies and businesses were unable to meet demand, countries that could, started to accumulate resources creating large scale volatility. OPEC at this point capitalized on the Declaration of Cooperation in order to restore some stability.
Their efforts resulted in the largest and longest production adjustments conducted by countries willingly in order to restore balance to the oil industry. Until recently.
Prevailing Situation
As of July 2021, the price of crude oil barrels increased by 2%. This happened as a result of speculation around increased output developing slower than anticipated and attempting to meet global fuel demands leaving reserves short.
OPEC+ (including allies to the organization) was said to have a meeting later in the week after the price hike in order to find a more amicable solution. Instead the UAE introduced a plan to block any immediate reduction within supply.
It was anticipated oil/petroleum output was to increase by 0.4 million barrels a day within the last half of 2021. Some OPEC+ members do not believe the forecast to be real and have been contesting any possibility of the same.
The OPEC demand forecast did not account for the new global pandemic variant plaguing markets and the limits placed on venturing outside curbing the need for high amounts of petroleum.
Read More About The Oil Price War Here
The UK Business Perspective
The beginning of the global pandemic saw inflation rise to 1.5% and this was as early as April. The costs of clothing and footwear also saw a 0.7% jump.
The Bank of England has been strongly attempting to maintain inflation rates below the targeted 2% but as global consequences trickle down to the UK, this process becomes harder and harder.
The cost of crude oil and petrol have almost tripled over the past year. Average gas prices have risen by a minimum of 1.8p and the ONS lifted the cap on gas and electricity pricing. This resulted in not only higher household utility bills but also expenses to run businesses.
Pre-Vaccine
Rising petroleum prices were not so much a concern with lockdown rules preventing individuals from travelling back and forth. With global borders closed, the layoffs were numerous but the attempt to limit further spread was actively employed by the UK.
With a rising number of individuals remaining indoors, British businesses were housing spaces that welcomed no foot traffic. The end result? Higher electricity bills for empty spaces.
The country faced a slower economic growth rate of 5% that further trickled down to 4.3% as of 2021. The UK was one of the world’s worst hit economies with over 150,000 deaths and 80,000 over the second wave.
11,000 high street retail outlets were forced to permanently shut down and the country as a whole was forced to repurpose £400 billion to redirect at enhancing emergency services. While already sitting in strong financial debt, the country even attempted to assist the flailing businesses.
With more organizations forced to close, more employees were laid off calling for stronger government intervention. A furlough scheme was put into place to cover up to 70% of salaries as of July and is said to conclude later this year.
Rising oil prices in pre-vaccine times created higher costs of living and basic amenities including electricity and heating. With the reduced petroleum consumption it would be presumed that the UK would have been able to stock oil reserves and wait for a world post-covid.
Post-Vaccine
As the economy attempts to bail itself out of rising inflation rates and costs of living, opening borders and travel mobilised once more at higher oil prices is likely to have a strongly negative impact on the economy.
The current budget deficit sits at GBP £394 billion. Rising oil prices means the country has to pay more money to slowly attempt to return activities to normal levels.
While over 51.8% of the population is fully vaccinated, the UK has been trying to promote economic prosperity and growth by encouraging more activity and purchasing.
Rising oil prices lead to rising household expenditure meaning individuals have less money to spend on helping the economy prosper. Additionally the higher translatable costs brought on by hikes in oil prices mean standards of living also take a dive without any additional income to supplement it.
The end result looks like more closed down businesses and consistently less footfall for the strongly prevalent middle class that are more likely to calculate the actual cost of expenditure before putting any money down.
Higher petroleum prices also translate down to more expensive emergency services despite being offered within the same capacity. The new COV-ID 19 strain, Delta has created a secondary stage of emergency worldwide.
Having travelled from India to the US, this is likely to have an effect on US spending power and strain the relationship between the US and UK.
Interconnectivity – The UK and The US
When the global pandemic hit the US, the government’s response was to introduce stimulus packages to supplement income and the unemployed. The stimulus packages cost their government over USD 1.9 trillion, offering USD $1,400 cash payments to 85% of American households.
The stimulus package created stronger opportunities for investment into the UK from the US. A poll conducted by Deutsche Bank revealed most stimulus recipients between the ages of 25 to 34 were looking to invest at least 50% of their cheque.
Additionally the Organization for Economic Co-operation and Development (OECD) projected a worldwide GDP growth of 5.6% up from the previously projected 1% thanks to the vaccine rollout.
The Bank of England, in this spirit, has been attempting to minimize overall interest and inflation rates. It is projected that the UK economy will grow by 5.1% this year and 4.7% in 2022. As OPEC introduces higher pricing for energy consumption and petroleum it is unlikely that these figures will remain as is.
Conclusion
The global economy took a turn for the worst when the pandemic hit. Most countries were scraping together funding to cover emergency service costs while first world countries were able to offer subsidies and assistance to their residents.
The UK was one such economy. Offering furloughs even at a time of strong debt was admirable but only met by futility with the rising oil prices.
With the UK seeing a large number of brick and mortar stores close and the movement to digital spaces fueled by electricity, how are British businesses supposed to thrive with high overall running costs even without a physical space?
Larger organizations may be able to keep their heads above water while waiting it out but the higher oil pricing looks like a hard time for MSMEs and as a result the economy as a whole.
For organizations with funding to spare, introducing a data analytics services team may help investigate areas for potential growth and revenue development. At times of uncertainty, big risks could mean big rewards.
