Fuel risk management: how businesses can mitigate rising fuel costs
Businesses across industries in the UK are operating against the backdrop of red-hot global and domestic inflation - a tell-tale sign that oil prices are on the rise. This has been compounded by events in Ukraine, with Russia’s condemned invasion providing a stark reminder that it’s the second-largest oil producer globally.
Fuel is a major expense for businesses of all sizes at the best of times - especially small and medium enterprises (SMEs) that lack the resources to absorb a sudden spike in prices. So, as the cost soars amid Brexit repercussions and Russian aggression in Ukraine, businesses are feeling the pinch where it hurts most: their bottom line. And it’s having a knock-on effect throughout the economy, with rising crude oil prices heating up inflation to decades high levels - prompting central banks to cool prices by hiking interest rates.
Soaring crude oil prices
The crux of the problem is soaring crude oil prices, which is used in manufacturing petrol and diesel. As the price of a barrel is pushed ever higher by geopolitical forces, the price of fuel is being dragged up with it. Take the UK and US for example:
- The cost of petrol at UK pumps reached more than £1.50 per litre following Russia’s invasion of Ukraine. Just two years ago it was at a low of around £1 per litre. Diesel, too, has hit a record of £1.55 per litre.
- In February 2021, the national average petrol price in the US was $2.65 a gallon. Fast-forward 12-months and it had jumped to $3.54, with experts predicting this could increase to $4 amid the Russia-Ukraine war.
Petrol costs have been inflated for some time after demand for energy - and its price - collapsed at the start of the Covid-19 pandemic. As economic confidence returned in patches, suppliers struggled to meet rising levels of demand immediately amid blockages in the supply chain, causing the price of crude oil - and products derived from it - to surge. Recent events have exacerbated the problem - and even generated talk of a '70s-style global oil shock.
Fuel prices look like they’re only heading in one direction as long as Russia’s invasion of Ukraine continues. Russia is the second-largest exporter of crude oil worldwide - only Saudi Arabia produces more - as it ships a whopping 4 to 5 million barrels per day (bpd) of crude, along with 2 to 3 million bpd of refined products. Vladimir Putin’s actions prompted Western allies to impose economic and trading sanctions on Russia - which is the European Union's biggest oil trading partner - stoking fears that they might retaliate and restrict its oil pipeline supplies to Europe.
The sweeping sanctions imposed on Russian companies, banks and individuals have left the Russian oil trade in turmoil. Oil trade is exempt from sanctions but buyers are eschewing Russian supplies to avoid unwittingly violating sanctions. Subsequent concerns over supply pushed the price of crude oil to more than $100 barrel - before rising again in the wake of further sanctions. Although the UK only imports 6% of its crude oil from Russia, it would still be impacted by global wholesale prices increasing.
The spike in oil prices has prompted coordinated global action: the US and 30 countries agreed to release 60 million barrels of oil from their strategic reserves to stabilise global energy markets, as oil prices surged to a seven-year high. However, news of the release - equivalent to less than one day of worldwide oil consumption - only heightened concerns that supply will be inadequate to cover growing disruptions. So, as demand surges past pre-pandemic levels and major producers struggle to keep pace, prices are set to keep on rising.
US president Joe Biden has been eager to prepare US consumers for the knock-on effect of rising oil prices. Speaking about petrol prices in the wake of the Russian invasion during his State of the Union address to Congress in early March, he said “I will not pretend this will be painless,” adding that his administration was “prepared to deploy all the tools and authority at our disposal to provide relief at the gas pump”.
In the UK, it’s not as simple as blaming the pandemic and Russian aggression on soaring fuel prices. To do so would mask Brexit's role in this perfect storm of challenges that businesses are attempting to weather.
In September 2021, petrol stations across the UK began to run out of fuel, sparking panic buying and queues of motorists that stretched as far as the eye could see - pushing up prices. While several forces were at play, the Brexit-specific causes were indisputable and significant - and continue to be.
A crippling shortage of HGV drivers has been precipitated by Britain’s departure from the European Union, creating challenges with delivering fuel. Of the estimated shortfall of 100,000 truck drivers, around 20,000 are non-British who left the country during the pandemic and have not returned - partly due to stringent, post-Brexit visa requirements to work in the UK, which took effect last year.
Will petrol prices come down?
That’s the million-dollar question - and it depends on two key factors: supply and demand in the world energy market, and what happens as the war in Ukraine unfolds.
Though sanctions against Russia have stopped short of targeting its oil and gas exports, future penalties could do so, leading to supply issues and price increases. There is potential for crippling supply disruption if Russia retaliates to sanctions by weaponizing oil. It’s almost impossible to forecast what kind of trajectory oil prices - and therefore fuel prices - might take amid this political jousting. Despite major concerns about the supply of oil, price is the biggest concern in the short term, as the US and Saudi Arabia are also huge oil exporters.
The UK government isn't expected to cut tax on petrol any time soon. Fuel duty is a major source of revenue for the UK bank balance - £28bn in 2019-20, according to the Office for Budget Responsibility. That's 3.3% of the nation’s overall tax income, equivalent to £1,000 per household.
Feeling the pinch
Global corporations might have the financial resources to absorb rising fuel prices - although exposure to complex supply chains will complicate the issue. Meanwhile, SMEs across industries are forced to navigate a variety of challenges that stem from this unwelcome situation - with business priorities such as supply and overhead expenses, service territories, staffing, and the pricing of products and services all impacted.
Businesses that operate across borders, relying on the global supply chain to import and export goods and services will be impacted, with haulage firms passing on the increased operational costs - from a manufacturing business that exports its products, to overseas markets, to a textiles business that imports materials to produce its goods. Other industries will be more directly impacted, such as shipping operators that need to fuel their vessels, to businesses in the travel industry that rely on transportation. In the short term, the challenge for these businesses is buying fuel at a price that is changing almost daily, having fixed their cost bases with suppliers months in advance.
Reece Dye, Head of Corporate Clients at Clear Treasury said:
"Businesses are currently experiencing an unprecedented squeeze on supply chains and it couldn’t have come at a worse time following the pandemic. Russia’s invasion of Ukraine has exacerbated the strains on the energy market which will increase costs for businesses across the UK, affecting all industries. You then have to factor in the strength of the US dollar as a result of the geopolitical uncertainty and you’re left with a concoction of rising prices for UK businesses. In such times managing your currency exposure is paramount in the here and now but it also highlights the importance of formulating a strategy in advance to protect yourself against adverse currency movement. Whether it be a global pandemic, Brexit, or war - uncertainty and risk sentiment will always filter through to the currency market and promote volatility."
Currency risk exposure
Challenges abound for businesses as the oil crisis tightens its grip on fuel prices. But opportunities will also present themselves - not least the opportunity to save money when making international payments amid currency market volatility. As businesses grapple with the fallout from the Russian invasion of Ukraine, they must be acutely aware of the need to manage their exposure to currency risk.
Currencies are traded around the clock - 24 hours a day. Therefore, the value of the pound against other currencies is constantly changing - not just daily but by the minute. Why do they fluctuate in value? Currencies strengthen and weaken each day because banks and investors purchase huge volumes in response to political and economic news: positive news about a country typically causes the value of the currency to rise (“strengthen”), while bad news causes it to fall (“weaken”).
We also know when they might move because we often know the timing of political events that might influence them, and the economic calendar shows us when influential economic data will be released. However, there will also be news that happens without warning - anything from a US president tweeting late at night to a fall in the price of bauxite.
Clear Treasury are experts providing clients with the knowledge and tools they need to operate across borders. Against the backdrop of a global pandemic, this guidance and expertise are more crucial than ever. Our relationship-focused approach achieves long term success and is underpinned by our dedication to excellent customer service.
We understand how technology is at the core of how businesses operate in the modern digitally-enabled world. This has enabled us to develop a technology platform that seamlessly integrates our products and services into your ecosystem - removing the complexity and risk involved in making international payments.
Our knowledge and experience allow us to provide our clients with solutions and guidance that help their business thrive when engaged in international trade, both through our team of experts and our innovative technology - and opening an account to access this specialist service is quick and easy.
You will be assigned a dedicated account manager who can help you to plan and establish a proactive hedging strategy. There’s no “one size fits all” approach to protecting your bottom line from the threat of currency risk. Therefore, a bespoke hedging strategy that aligns with your requirements, commercial context, and risk appetite will allow your business to execute effective solutions that sync with its aims. This dedicated expert can provide guidance and support on tools to track, target or fix exchange rates for currency transfers to hedge against currency risk when making international payments.
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A forward contract is a foreign exchange agreement to buy one currency by selling another on a specified date within the next 12 months at a price agreed on now, known as the forward rate.
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