The Impact of the Latest Fuel Prices on Business and the Economy

Over the last 12 months we've seen the price of crude oil going up and down like a yoyo. At its peak it soared to over $140 per barrel in June 2008, before collapsing to $40 per barrel in December 2008. Since this volatile period it has climbed slowly to $72 per barrel without much fluctuation. So what does all this mean to the man in the street?

Crude oil prices translate directly to the price we pay for fuel at the pumps. Of course it is made worse by ever increasing duty rises, the most recent of which was implemented by the government to pay for the VAT reduction we received last December. A fine example of what you give with one hand you take away with the other.

But what of the hidden effects of volatile fuel markets? Increased fuel costs increase transportation costs which, in turn, drive higher costs for every day food products that we consume. As consumers, we have not helped the situation. As our choices at the supermarkets grow, in turn we desire more - like demanding strawberries in winter and new potatoes all year round. We also want specialist food ingredients from China and South America. Then to top it all, we demand imported electronic equipment to feed our gadget addictions and foreign manufactured cars to get us from A to B.

The point is that oil price rises ripple throughtout the economy and, unless we change our habits as a nation/world, or develop a cheap renewable energy replacement, the impact of oil price movements will continue to drive the economic cycle.

It is widely accepted that poorly regulated bank lending on property portfolios was the primary cause of the current recession. It was hidden from the public through a maze of complex transactions dreamed up by financial whizz kids, like a house of cards. However, it wasn't the only cause of the economic meltdown now gripping the industrial economies. Oil addiction also contributed.

The extraordinary rise in oil prices since 2003 sucked hundreds of billions of dollars out of the world economy. High oil prices have been a contributing cause of most recessions. Since 1948, famous economic commentators have made statements like "All large oil price increases but two have been followed by recessions", "Four of the five recessions since 1970....were preceded by big jumps in oil prices."

What's more, the oil price surges of the recent past directly helped to trigger the wave of defaults and foreclosures that revealed the over-extension of mortgage lending. High energy prices have severely strained family budgets - especially low and moderate income family budgets. Some of those families couldn't afford to keep paying their mortgages and also buy petrol for their cars and heat their houses.

If this all sounds like a vicious circle, it is. Unfortunately, this is so well known that the changes in oil price impacts massively on exchange rates. Consequently the more our own businesses become "international" the more risk there is in the supply chain, customer base and cost profile of the business. As an FD, all I can say is "go careful out there". In such volatile conditions, visibility and awareness of these risks are paramount.

If the changing price of fuel is affecting your business's profitability then contact the FD Centre today. We will work with you to help minimise the impacts of the changes in the economy and bring back stability to your business.

Entrepreneurial Vision - November 2009 - Contents Page