How do UK businesses benefit from lower oil prices?

February 2, 2015 by Andy Crow

How do UK businesses benefit from lower oil prices?

While Brent Crude has dramatically fallen to its lowest level since May 2009 at under $50 a barrel, business managers in the UK are increasingly asking how and when they will benefit from this drop in oil prices.

The most noticeable effect is through the reduction in the price of petrol and at supermarket pumps a litre of unleaded is now under £1.10 compared to £1.31 a year ago, a fall of 17 per cent. Given that the price of oil has fallen by 50 per cent in the same time, why isn’t petrol even cheaper? Primarily it’s because nearly 70 per cent of petrol prices are made up of Fuel Duty and VAT with supermarkets enjoying a margin of less than 5p per litre after costs.

Fuel bills are less affected by sudden price changes in oil. Energy UK is the trade association for the UK energy industry and made the following points after questions were asked by MPs;
• Very little oil is used in electricity production in the UK, only 0.002% of demand met by the grid, so oil prices have very little effect here.
• Gas (either for electricity generation or household and business use) is not purchased at one price. Gas is bought in the wholesale market, from one day ahead to several years. Some gas prices have fallen, some have stayed stable, while some are now rising again .It’s impossible to cite one price for gas as paid by suppliers.

However, EON cut gas prices by 3.5% with immediate effect on 13th January and British Gas announced that it will cut its price by 5% on 27th February. Both cited lower wholesale prices, which ironically, undermines the message from Energy UK.

One driver of lower oil prices has been the rapid growth of US energy production where gas and oil is extracted through fracking. This increase has had a huge effect on domestic gas prices in the US which in 2006 were roughly the same as the UK but now stand at about one third. While the UK still imports over 50% of the gas it uses, the domestic market will still remain at the mercy of the complexities of wholesale prices.

Chorus Advisers can advise you upon the opportunities that exist within the marketplace to secure the best energy deals for your business and further assist in reducing your costs. Please contact us on 0845 867 1263 or email info@chorusadvisers.co.uk for more information.

This article is by Andy Crow at Chorus Business Advisers