Oil On Troubled Waters – The Dangers Of Falling Oil Prices

  • May 12, 2015

The price of oil has been changing. Unless you have been living in a cave for the last few months, you can’t help but notice that this is happening. The newspapers are full of all kinds of articles. From attempts to explain the way the very complex pricing structure of oil works to those of us without economics degrees. Through to wildly speculative guessing games on how the price change will bring the cost of petrol below £1 a litre.

For those of us who deal with the freight sector on a daily basis, as we do here at First Choice UK, the situation is naturally of specific interest. Fuel is our lifeblood and anything that affects the cost is bound to be important. So realistically then, what is the practical effect going to be?

First a little bit of background. Sometime around last June, the price of oil started to fall dramatically. By the time we reached the beginning of this year, there had been a steady decline in price and, despite a small upturn in February, the price is continuing to decline. The reasons are many (and certainly too many to cover in this article) but in over-simplified terms it is a result of a glut of product, new methods of production and a strong dollar combined.

So good news then? Will Fuel, therefore, be cheaper? Well, yes in principle it’s great news. But, at the risk of being a wet blanket, we need to be aware of how we manage the expectations of the drop in price to the consumer.

The fact is that, in the long run, the price will drop. However, it is clearly going to take a time for this to filter through to the chain of supply. As we all know the movement of freight isn’t all about the cost of fuel. Admittedly it is a significant cost in the pricing structure but there are also all the other fixed costs to factor in and they are not dropping. In fact, standing costs such as premises, ongoing maintenance, vehicle repairs and servicing and so forth are likely to be rising.

Then we need to be clear with the expectation of how much the drop in price will affect the price on the street.

As you will probably know, the cost of a litre of fuel for the end user is made up of around 70% duty. That ration is not going to change so while the base cost may drop; the overall costs will still be inflated by the duty.

In the end, we are talking about pennies a litre in a reduction. And that will take a time to filter its way through existing agreements of supply, the system of production, and indeed the pricing infrastructure of the businesses involved in the supply chain.

Now the good side! The price of oil is dropping and despite the ongoing battle over duty and all the other costs involved, that will mean a cheaper service in the long run. Lower costs, when passed on to the clients who use freight services, should mean more business.

Couple lower oil prices with the increased demand due to the current confidence in the market place and you have a very good outlook for the freight industry.

Of course, the increasing demand will also mean an increase in the demand for people to work in the industry. If you are looking for a change or looking for staff why not give us a call to discuss how we can help?