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Protect your business from fuel price volatility
Gaining control of fuel spend in an uncertain world
As consumers, we are aware of ways that we manage financial risk in our day to day lives. From taking advantage of fixed or capped rate mortgages to protect ourselves from changes to interest rates to managing our gas and electricity bills by opting for a fixed price tariff. Most of us are not speculators and therefore use these tools to give certainty in an uncertain world, allowing us to budget our outgoings and control spend.
One of the most visible examples of volatility is the cost of petrol and diesel; it is a distress purchase and one of those items that you have to buy but hate to buy. What’s more, with prices shown on pole signs next to forecourts we are painfully aware of the frequent changes to the cost of filling up our cars. These prices can change almost daily and are impacted by both factors at home and abroad, the majority of which we have no control over.
The two major factors that affect petrol prices in the UK are the underlying oil price and exchange rates. Oil prices can be impacted by changes to supply, demand and also geopolitical factors. Changes to the number of operational oil-rigs, strikes in oil producing geographies, shut downs caused by adverse weather and conflict all have an impact and cause prices to go up or down.
THE COST OF VOLATILE OIL PRICES
Over the last two years we have seen Brent Crude trade within a range from 35 US dollars per barrel up to 58 US dollars per barrel, this represents an increase of 65% in the underlying oil price in just 20 months.
Oil is a commodity traded in US dollars, so the daily value of the pound versus the dollar also impacts the price we pay in pence per litre for our fuel. The Brexit vote in June 2016 triggered one of the largest exchange rate changes of recent years, with the value of the pound falling from 1.48 USD/GBP to 1.31 USD/GBP in a matter of two days. The impact of this on pump prices was around 4 pence per litre, that’s an increase of 4% in just two days (including VAT).
Since the oil price bottomed out in January 2016 the combined impact of the oil price and exchange rate volatility have caused a 25 pence per litre increase in pump prices (including VAT).
For businesses the impact of this volatility is considerably greater, few organisations have no logistics costs and for some businesses fuel for transportation of goods can be one of the largest outlays. Increases in fuel cost can be a major headache, blowing transport budgets and impacting cash flow.
BP Co Avg. Pump Price (Diesel ppl.) 129 126 123 120 117 114 111 108 105
Avg. Diesel (ppl) Source: BP Owned non-motorway sites pump price (publically available)
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