Have you often wondered why people, especially business ventures, panic and worry when oil price shocks come into question? The answer may seem to be complicated, but in reality, it is pretty simple. This is because business operations, manufacturing, production, logistics, etc., all rely on oil as an essential resource.
Here is a breakdown of how a positive oil price shock i.e., an increase in the price of oil, impacts businesses and creates hurdles in achieving business goals and aims.
Higher production costs
Oil acts as the backbone that helps streamline business processes. From using oil to transport resources, raw materials, and more, it serves as the principal agent needed to get the business process started. The higher this cost is, the higher the domino effect it will create, thus, causing all production processes to experience a boost in costs.
Covering this cost can be difficult, especially if the business is operating at a breakeven point. Figuring out how to keep costs low without compromising on the quality of the product is, therefore, another challenge that businesses face.
Fall In demand
As higher oil prices push production processes to become costly, the impact is translated into higher prices for the final product or service. This is where the aspect of inflation comes in. Customers prefer investing in products that are inexpensive and budget friendly. With higher prices of products, a fall in demand is sure to follow. This can be a major hurdle that businesses struggle to overcome. A few ways of doing so are by coming up with innovative marketing strategies to help pull up the demand for the product once again.
On the other hand, with a negative oil price shock i.e., a fall in the price of oil, the opposite can be expected. Cut downs in production costs and transportation become the obvious impact, followed by an increase in overall demand for the product.
Wrapping it Up!
So, there you have it, an insight into how oil price shocks create a domino effect that impacts businesses across the globe. By having a basic idea about this process, you can predict and anticipate what impacts the current or next oil price shock would have on your newly started business venture. This can help you stay prepared and focused on using the right tools to mitigate the adverse impacts going forward.
