How Geopolitical Events Affect Energy Markets and Business Energy Prices

The latest events in the Middle East exposed the sensitivity of the UK and global energy markets to geopolitical events. The price of Brent crude rose to its highest level in 5 months following US airstrikes on Iran and the Iranian retaliatory attacks. While the markets have not reached previous crisis levels, the latest fluctuations reveal market nervousness around critical supply routes and LNG supplies.  

The UK doesn’t source much of its energy directly from the Middle East, so why should UK business owners be aware of global events? The simple answer is that geopolitics impact supply and demand, which are directly connected to wholesale energy prices.  

The pandemic, the war between Russia and Ukraine, and the ongoing Middle Eastern conflict are some major examples of geopolitical events that have disrupted predictability and fuelled energy market volatility since 2020. In this blog, we take a closer look at the connection between geopolitical events and our energy spend. This ensures you are better positioned to make informed decisions for the future of your business, manage costs, and build resilience in response to volatility. 

What Shapes Energy Prices? 

To understand the ripple effect of geopolitical events in the energy market, it’s important to understand what shapes our energy prices. In the UK, we operate in a global energy market, which is affected by global supply routes, futures trading, and market risk.  

When global supply is put at risk as a result of conflict or infrastructure threats or issues, the market responds and prices rise around the world. In simple terms, when oil (and LNG) supply security is threatened, the oil (and LNG) price rises – and wholesale gas and energy prices follow.  

Market fluctuations related to geopolitical events have both immediate and long-term effects on wholesale energy prices.  

Conflict 

Oil is one of the world’s most important energy sources. Many oil reserves are located in politically volatile regions. The oil price is sensitive to instability, conflict, and the threat of instability in these areas. Speculative buying in response to risk also drives up prices. 

The Organisation of the Petroleum Producing Countries (OPEC) has the power to adjust production levels in response to political or economic factors, which affects the oil price. 

Infrastructure and Shipping Routes 

Infrastructure is essential to delivery of energy resources. From maritime shipping routes to gas pipeline politics, these crucial conduits are vulnerable to geopolitical threats – and is a direct cause of price volatility. An example of this was the disruption of natural gas supply of gas to Europe during the Russian-Ukrainian conflict. Most notably, this took place during winter when demand was at its highest.  

Following US airstrikes on Iran, the concern was that the Strait of Hormuz would be closed by the Iranians. This is a critical shipping route. Its closure would affect the movement of around 20% of the world’s oil and gas – a threat that revealed market sensitivity.  

Weather 

In the race to net zero, the UK has a growing dependency on renewable energy sources. This makes the weather a key consideration for the future of the energy market. Where wind and solar sources are unavailable, there needs to be sufficient fossil fuel capacity as a fallback plan. Inconsistency of supply and demand can lead to price spikes in this regard.  

 The Effect of Tariffs, Trade Wars, Sanctions, and Inflation 

Tariffs have had the effect of slowing manufacture in some export-driven countries. Reduced production means reduced energy consumption and lowered energy demand. While this may positively affect the energy market, uncertainty has the converse effect in the long term.  

In the case of sanctions, slowed energy investment in energy producing nations is one of the effects. This makes their resources more expensive.  

Make the Shift to Smarter Business Energy Procurement and Strategies 

From supply and demand to lost investor confidence and the effects of events on energy production and investment, geopolitical events have a ripple effect through the market. For businesses, there is an opportunity to strategise in response to uncertainty.  

At Smarter Business, we have the expertise and industry knowledge to guide you through the best procurement and energy management options for your business. Contact us today to design the right energy strategy to protect your business from market fluctuations and build resilience to geopolitical effects on the UK energy market.