How The Rise in Oil Prices Affect Businesses

How the rise in oil prices affect businesses?

UAE increases fuel prices; a litre now costs over Dhs4. The UAE energy ministry substantially elevated the prices of petrol & diesel for the month of June, taking effect in June.

Super 98 petrol now costs Dh4.15 a litre, compared to Dh3.66 in May.

The price of a litre of Special 95 petrol is now Dhs4.03 compared to Dhs3.55 in May 2022.
The litre of E-Plus 91 has also risen to Dhs3.96, compared to Dhs3.48 in May 2022.

As the prices of all types of fuel exceeded the Dhs3 for the first time in the history of the UAE.
These prices include a value-added tax of 5 per cent.

(The data for the country and other countries in our database are obtained from official government sources, regulatory agencies, petroleum companies, and major media sources).

Why are fuel prices high?

The wave in gasoline prices is majorly, due to, the rise in oil prices. Russia’s invasion of Ukraine is the latest facilitator to aggravate the crude at a higher cost, however, prices were already on a hike before the war.

Even before Covid hit, energy producers were moving back on investment & less profitable projects under pressure from low prices & institutional shareholders demanding higher returns.

Then manufacturers further decreased output during the waves of the pandemic, when the need for petroleum products fell drastically.

Economies have since resurrected; production has stabilized, people are driving & flying again. This has led to a surge in demand & a progressively tight oil market.

Oil price increases are generally thought to increase inflation & reduce economic growth. In terms of inflation, oil prices directly affect the prices of goods made with petroleum products. Moreover, oil prices indirectly impact rates such as transportation, manufacturing, heating etc.

When crude oil prices soar, naturally, input costs & overall production costs also increase. This causes profit margins to fall which in turn lowers stock prices. Conversely, a fall in oil prices will have an adverse effect.

How are fuel prices affecting companies?

Demand demolition, or the rate at which increasing prices impact consumer behavior, from rising fuel expenses are filtering throughout the economy. Higher petrol prices imply not only less expenditure by consumers’ pockets but also escalating costs for companies, some, or all of which will later be passed along to consumers.

Generally, oil price fluctuations substantially affect oil importers’ production costs, consequently, price levels, while in energy distributing countries oil price movements mainly affect energy export revenues & government budget revenues.

The plunge in oil prices has come despite the OPEC+ deal to reduce almost 10% of global crude supply (about 10 million barrels per day, bpd) effective May 2020, bringing supply down to approximately 90 million bpd.

In April, the International Monetary Fund (IMF) predicted a narrowing of growth in the Gulf Cooperation Council (GCC) countries of 2.7% in 2020. Non-oil activity is anticipated to be a major struggle on the futuristic outlook, contracting by negative 4.3% this year, a significant descending alteration from the 2.3% growth projected in the October World Economic Outlook.

Price increases reduce the purchasing power of money that in turn has an adverse impact on consumers’ welfare. The primary measure of overall price increases in the economy is condensed by the inflation rate.

How Rising Oil Prices Threaten Economic Growth

Let’s consider the adverse effects of the increasing oil prices within the economy. Just like the example of steel, an increase in the oil costs eventually raises every element of the economy leading to inflation. For instance, transport costs, input costs, manufacturing costs, and virtually all-economic activities observe an upsurge in expenses prominent to inflation. Further, we need oil practically in most products that we use. Plastics, metal items, electronic goods, and even processed food items that depend on oil for their manufacturing all witness an increase in costs leading to all round inflation.

This is also why market analysts, stockbrokers, & virtually everyone trading in finance eagerly observes the developments in the oil markets around the world along with the geopolitical happenings in the Middle East.

The reason being, that this area provides the maximum share of the world’s oil production, & it is considered sensitive & crucial to determining the price of oil.

Moreover, it can be said that oil is the lifeline of today’s economy therefore, we cannot simply ignore the importance or centrality of oil in our lives.

How can we help?

It is important to have your business evaluated & accounts sorted at times like this. In times of inflation, where you may either let go off people or increase their wages, budget management plays a vital role.

Our valuation experts will assist you in keeping your financial records sorted, along with assessing the probable risk factors for your company.

Contact us to help you sustain in times of the inflation. We will provide with a free 30-minute consultation!

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