Managing energy price volatility

Fuel volatility has become one of the most consequential risks facing UK businesses, whether through direct exposure or accidental. Despite the prospect of easing oil prices, organisations may not yet breathe a sigh of relief.

 

Recent months have seen attention being dominated by geopolitical disruption. The closure of the Strait of Hormuz and instability across key shipping routes have driven one of the largest supply shocks in modern oil market history. As markets begin to price in a potential recovery in supply, forecasts suggest a surplus could emerge over the next year, with production expected to outpace demand growth.

 

While on the surface this should signal a return to stability, in reality volatility is now the rule rather than the exception. 

 

 

The reality of the market

Beyond elevated fuel prices, businesses also face the challenge of sustained yet unpredictable cost movements across multiple commodities simultaneously. Operators in sectors such as logistics, agriculture, manufacturing and construction are exposed not only to fuel costs but also to fertiliser and metal costs. When disruption hits at one of these inputs, it compounds across the entire cost base. 

 

Attara’s proprietary data highlights the extent of this exposure. Businesses that had not hedged their exposure prior to the Middle East disruption saw their energy costs rise by at least 26 per cent within weeks. Diesel prices alone increased by roughly 18-20 pence per litre since late February, with sharper spikes across certain regions.

 

The aggregate impact is significant. UK SMEs spend an estimated £2-2.5 billion annually on transport fuels, and if current price levels persist, the additional cost burden across commodities could approach £1 billion. For small to medium-sized enterprises, the numbers are equally stark. For example, a haulage firm running a fleet of 20 HGVs could face up to an additional £140,000 in annual fuel costs.

 

 

Impact of cost behaviour

Businesses that absorbed costs at the height of the market do not benefit retrospectively from subsequent declines. Even as oil prices have begun to fall back from recent peaks, falling from $120 per barrel to nearer $80, the speed and unpredictability of these movements create a fundamentally unstable operating environment.

 

Such a dynamic creates a planning challenge across the board. Budgeting becomes less reliable, pricing decisions carry more risk, and long-term contracts become harder to commit to with confidence. In fuel-intensive sectors, where energy can account for a substantial share of operating costs, the levers available to offset these pressures are often limited.

 

 

Reacting to risk or managing risk

While exposure to volatility remains uneven across the market, differences in preparedness are becoming increasingly visible. Larger organisations have traditionally had greater access to risk management strategies that allow them to smooth out price fluctuations. Many smaller or scaling businesses, by contrast, have historically been excluded from access to such tools due to size, cost, or limited awareness.

 

However, there are signs that this is beginning to change. In recent months, there has been a marked increase in businesses that previously didn’t or couldn’t hedge and are now actively exploring hedging strategies, particularly in sectors with high sensitivity to input costs and limited price flexibility. In many cases, this shift is being driven by necessity rather than long-term planning. 

 

Timing remains a critical factor in hedging. Businesses that implemented hedging structures earlier have been able to secure lower input costs and avoid the worst of recent price spikes. Those acting now are doing so in a more expensive and uncertain environment, having already absorbed avoidable increases.

 

 

Rethinking hedging

For many businesses, hedging is usually perceived as complex or speculative. In practice, the core principle is straightforward. A forward contract simply converts a variable cost into a fixed one, allowing for more predictable financial planning. The objective is not to forecast the market, but to reduce exposure to it.

 

In an environment where even relatively small price movements can materially affect margins, certainty has practical value. Commodity risk can no longer be treated as a passive external factor, no matter the size of the business. It is becoming a central consideration in operational and financial strategy across a wide range of industries.

 

 

Looking ahead

In the current oil market, even if increased production lowers average prices over time, the underlying volatility will persist. Supply disruptions, geopolitical developments and shifting demand patterns will continue to drive sharp movements. 

 

As a result, businesses need to move beyond the question of whether fuel prices will rise or fall next. The more important question is how they can operate effectively when prices do both, often in quick succession. For SMEs in particular, the shift from reacting to volatility to managing the exposure will be critical to protecting margins in the months ahead. 

 

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Tom Ricketts is Head of Fuels at Attara

 

Main image courtesy of iStockPhoto.com and peshkov