Entrepreneurs: How to turn high oil prices into sustainable opportunities

Global oil prices have risen above $100/barrel. The conflict in Ukraine is one driver of higher prices. Others include tight inventories, scant spare capacity, and expected record-high demand. Higher oil costs may threaten entrepreneurs’ profits, sales, and viability in the near term. But today’s high oil prices may also spur change, unlocking new commercial and sustainability opportunities.

We identify three ways for business owners to make strategic or operational changes to support the energy transition and deliver commercial and environmental impact. Major oil price benchmarks are near or above $100/barrel at the time of this writing. Higher costs may threaten entrepreneurs’ profits, sales, and viability in the near term.

However, we believe this provides further incentives for far-sighted business owners to accelerate energy transition plans. We outline three actions to support your business’ financial and sustainability ambitions.

What’s going on with oil prices?

The conflict in Eastern Europe is one reason for higher oil costs. It is not the only reason:

• Inventories are tight — OECD commercial stocks began the year below 2.7 million barrels, a far cry from the record high of 3.2 million barrels in mid-2020.
• Spare capacity is expected to drop in the second half while we forecast oil demand will reach record highs in the coming months. To balance supply and demand, higher prices are needed to spur investment and offset falling output from maturing fields.
• Overall, we expect Brent crude oil to trade between $90-$100 a barrel this year.

What do higher oil prices mean for business owners?

Unless business owners sell oil, higher oil prices may be viewed as a negative. Higher oil prices increase direct and indirect input costs, impacting profit margins. Businesses and consumers that depend on oil will likely respond to higher prices by spending more on oil and less on non-oil goods and services. Businesses selling non-oil goods and services may therefore experience lower sales.

And the broader rises in global energy prices can threaten not just electricity pricing, but also availability, particularly if smaller businesses are unable to secure competitive fixed contracts.

This is a threat to business viability. It is also important to view higher oil prices in the context of the broader tightening in sustainability regulations, such as legislation around carbon prices. Emissions and their effect on the environment also impose an indirect cost on a growing number of businesses. At the time of writing, European carbon permits were 5% below their record high set on 8 February.

The debate continues in the United States, with President Joe Biden’s administration facing legal challenges to its proposed social cost of carbon at $51/ton of carbon dioxide emissions. And Singapore recently announced that its carbon tax would rise to SGD 25/metric ton of CO2 equivalent in 2024 and 2025, a fivefold increase from today, to accelerate its net-zero emission efforts.

Where are the three opportunities for entrepreneurs? Access the full report here: Download the report.

To learn more about the ongoing conflict’s impact, register now for April 8 Peak Performer webinar, “The invasion of Ukraine — The economic and middle market impact,” featuring experts from UBS Americas.

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