How Global Events Impact Energy Costs

Small businesses across the UK are feeling the pinch as energy costs continue to rise. Understanding why prices have skyrocketed in recent years can be challenging, but one key factor is the influence of global geopolitical events.

These events, often thousands of miles away from British shores, can directly impact the prices UK businesses pay for electricity and gas.

Disruptions to Supply

Geopolitical tensions can disrupt the supply of energy resources like oil and natural gas. When supply chains are interrupted, prices in the UK tend to rise due to scarcity.

For example, the war in Ukraine has significantly affected Europe’s energy market. One of the belligerents, Russia, is a major natural gas supplier. The sanctions imposed on Russian energy exports after the state invaded Ukrainian territory have caused a drop in supply. This has led to higher costs for gas and electricity across Europe, with small businesses relying on gas-powered equipment or heating hit particularly hard.

Instability in oil-rich regions like the Middle East can also disrupt supplies. Although the UK sources much of its energy independently, global markets are interconnected, and disruption in one area can lead to higher prices elsewhere.

Shifts in Demand

Global events can affect energy demand as well as supply. When demand increases, but supply can’t keep up, prices rise. For example, after the COVID-19 pandemic, global economies began to recover, leading to a surge in consumption. However, energy suppliers struggled to meet this sudden demand, which caused price spikes.

Another example is China’s role in the global energy market. As one of the biggest consumers of natural gas and coal, any changes in China’s economic activity can disproportionately affect global prices. Even if domestic conditions are stable, energy costs could rise unexpectedly for UK businesses.

Exchange Rates

Energy prices are often tied to the US dollar, the standard currency for global energy trading. When the British pound falls in value against the dollar, importing energy becomes more expensive. International trade disputes or financial crises can cause currency fluctuations that impact energy costs in Britain.

These additional costs can be challenging for small businesses operating on tight margins. Even minor increases in energy bills can quickly add up in the long term.

Regulatory Changes

Global factors can lead to changes in energy policies internationally and in the UK. For example, sanctions on energy-exporting countries can reduce the availability of oil and gas on the market, driving up prices.

At the same time, many countries are increasingly focused on transitioning to renewable energy sources to combat climate change. While this shift is essential to a sustainable future, it comes at a price. For British companies, this could mean higher energy bills in the short term as the energy sector invests in new infrastructure and technology to make ‘net zero’ possible.

Infrastructure Weaknesses

Geopolitical events can affect energy infrastructure. Physical attacks or cyber threats on pipelines, power grids, or storage facilities can create temporary supply shortages, pushing up prices.

For example, the Nord Stream pipeline, a natural gas route which runs from Russia to Germany, was sabotaged by underwater explosions in 2022. The leaks, which occurred in international waters, caused significant disruptions to Europe’s energy supply. Events like these highlight how vulnerable critical infrastructure can be.

What This Means for British Businesses

Rising energy costs put pressure on small businesses. Whether you run a tiny café or a vast manufacturing operation, high energy bills can eat into profits. Here are a few steps small businesses can take to manage these challenges:

• Consider switching to a fixed-rate energy contract to protect against unpredictable price fluctuations.

• Upgrade to energy-efficient lighting, insulation or equipment to reduce consumption.

• Stay informed on current affairs and energy markets to help you anticipate changes.

• Install solar panels or other renewable energy sources for more stable long-term costs.

In Summary

While geopolitical events may appear beyond your control, their impact on energy prices is something business owners can take into their own hands. Small businesses can manage their energy costs in an unpredictable market by understanding global influences and taking mitigative steps.

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