Home A Commodity in Crisis: What does the Crude Oil Crash Mean for Your Business?

A Commodity in Crisis: What does the Crude Oil Crash Mean for Your Business?

Posted by on February 8th, 2016.

oil drums

If you have even the most basic knowledge of the world’s commodity markets, you’re likely to be well aware of the fact that the price of oil has plummeted over the past year. Although oil edged back above the 30 Dollars per barrel level in February, ‘Black Gold’ could be set for further volatility.

For this reason, we’ll be taking a look at how the turbulent price of this key commodity has the potential to impact your business in a major way.

A Brief History of Oil Prices

Oil has always been a volatile commodity as the price is affected by both the actual supply present in the world as well as the political situation in the countries that produce and export it.

One of the key shifts to be aware of is 2008’s global financial crash, which resulted in oil prices diving from a peak of $140 per barrel to a trough of just above $40 by the start of 2009. From then on, the price generally rose in line with global trading markets, although the closing months of 2015 put the price onto another historic downwards trajectory.

Rather than the price plummeting due to a global economic meltdown, the cost of oil fell dramatically for the second time in 10 years because there was simply too much of it. Both OPEC and the US had been churning out countless barrels of oil per day, far in excess of the actual demand for the commodity.

The increasing focus on sustainable, renewable energy sources has only amplified this disparity between supply and demand and Iran’s return to the world of oil exportation hasn’t exactly helped since its sanctions were lifted at the start of 2016.

As a consequence of this severe shortage of demand, the price of oil has hit a low under $29 so far this year, with predictions from various speculators putting forward a low of $20 or even $10 per barrel being this year.

The current rate has been hovering around the $30 mark for some time, so long so that plenty of every day objects now have a higher comparative valuable than a barrel of million year-old fossil fuel, some of which might surprise you.

What does All This Mean For My Business?

As a consumer, you may see a direct link between lower oil prices and lower spending costs as oil, in one form or another, is abundant in everyday life. Plastics products are all but unavoidable on the high street and components and ingredients in medicines are also a prime consumer of one of crude oil’s many derivatives, petroleum.

In essence, you can scarcely move these days without running into something that was made using oil; if it isn’t a primary component in some shape or form, it was likely used to power or facilitate the machine that was used in the manufacturing process.

Manufacturing processes in general are a key consumer of the world’s oil supplies, whether it’s keeping the car on the road or keeping your house warm in the winter.

As a business owner or a shareholder, the impact of the drop in oil prices on your business really depends on just where in the world you are and what you do. Naturally, an oil drilling business will likely have to make some cuts and operational re-evaluations to stay afloat in this time of low cost and low demand. BP have recently made headlines in this way by cutting 7000 jobs in the wake of a -£4.5bn loss. During the winter months, however, even a low cost will be countered with somewhat higher demand, given that increased heating and lighting in these times is always going to be a requirement of advanced nations.

If, on the other hand, your business relies on oil imports to function, chances are that business will currently be booming. Lower fuel costs mean increased output for the same amount of money and greater ease of transport both domestically and internationally. On the flip side, however, it is possible that exporting to the US, Canada, India and Norway, as well as many Middle Eastern nations, will bring difficulties from reduced demand due to weaker currencies in the recipient nations.

On a global scale, the basic effects of low oil prices are that producing countries like the US, Canada, Russia and Norway are likely to feel the squeeze from a reduced income from their once-reliable commodity, while oil importing nations such as the UK are more likely to enjoy a boost in national economic growth due to lower energy costs and increased disposable income.

Where Will Oil Prices Go from Here?

The big question when it comes to oil prices is what does the future hold? Depending on what your role is in the great oil consuming machine, you could stand to gain or lose in the future if the price of oil hits the lowest forecasts currently out there.

As a domestic consumer, chances are that the lower the price of oil in 2016, the more you’ll have to spend on things that aren’t fuel. However, if a production agreement between the OPEC and the world’s other oil producing nations is reached and raises the cost of the commodity once again, global corporations could benefit while SME’s find themselves out of pocket when it comes to keeping the generators running.

On a closing note – just a word of warning if you were thinking of capitalising on current circumstances and filling your house with barrels of crude oil – buying the stuff and storing it domestically is not to be recommended!

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