Is it time to stick or gamble when it comes to buying oil?

Robert Gillingwater
posted by Robert Gillingwater
3 March 2015

The price of oil affects us all. Its impact may be shown in the price we pay to heat up our houses, or the cost of filling up our cars.

But the recent developments in the oil industry are as a result of activity at a much higher level than our day-to-day lives.

Just six months ago the cost of oil was $115 per barrel, today the price is closer to $50 per barrel. A number of incidents around the globe have contributed to the plummeting price. One of the reasons is the weak demand brought about by the stagnation of many of the world’s leading economies.

Supply-side factors have also contributed. Heavy investment from the US in shale gas wells has significantly reduced its level of oil imports, while OPEC’s insistence on not reducing production (to protect market share from high-cost sources of oil such as Canada and the US) has restricted an increase in the price per barrel.

Developments in Europe this year have also had energy experts second guessing what will happen next; the geopolitical situation in Russia and the Ukraine has seen Western sanctions placed on the former. Such sanctions, imposed in September last year, targeted Russia’s heavy dependence on its energy sector (oil and gas account for 70 per cent of Russia’s export income).

So what does this mean for us? Historically, a low crude oil price has a helped aid economic growth through falling business costs while consumers can experience a rise in disposable income, as we saw in the 1990s. Empirically we are seeing some evidence of this in the UK: the big four supermarkets have announced fuel cuts while some airlines have reduced surcharges on certain flights. In addition, the government is putting pressure on the energy sector to ensure customers feel the benefit of reduced oil prices. The UK has also seen a narrowing of its trade gap (difference in the value of its imports against the value of its exports) with the falling price of oil – down to £1.4 billion in November from October’s £2.2 billion figure.

But many businesses are faced with an important procurement decision when it comes to energy. Do they commit to an agreement on their energy supply now, or gamble and wait for it to decline further? With the price of oil at its lowest level for five years, many businesses are likely to soon see more favourable prices from their energy supplier than they may have done in recent years, but some will surely feel holding out even longer will secure a more substantial saving.

As a net importer, Britain should benefit as a result of the drop in oil prices; but the extent of the benefits British businesses enjoy will be based on individual procurement decisions in the coming weeks and months.

Robert Gillingwater is a consultant at Procuring

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