Have you heard of the “Butterfly Effect?” Based on the idea that the flap of a butterfly’s wings contributes to a hurricane, this theory posits that one small event can snowball and have much wider consequences.
It’s a notion that small business should take seriously. The ability to identify events, moments, and trends that might filter through to you can provide an important advantage.
Think about this through the prism of oil prices. Oil prices climbed above $50 USD a barrel again in late spring 2016, after records showed a fall in prices at the end of 2015 and the beginning of 2016. The market is divided over the question of whether the oil price gains can be sustained throughout the rest of 2016. This will be particularly of interest when it comes to CFD trading and other investments that are closely tied in with assets, but it also has an indirect effect on the wider economy.
But if the oil price change is the flap of the butterfly’s wings, what headwind will blow in your direction?
It’s important to first consider what has actually happened to the price of a barrel of oil.
The closure of a processing plant in Nigeria is thought to have hit the global supply of oil, while wildfires in Canada disrupted the region’s oil sand production. Global factors such as these drive up the cost of a barrel of oil. Shale firms in the U.S. have also cut back output to counteract the low prices, which made it uneconomic to continue drilling.
What is the impact?
Regardless of what business you are in, both your personal and business life are affected by higher oil prices. If you are a small business owner, changes in oil prices will impact many different aspects of your business:
Transport: Most businesses depend on travel to some extent. Many smaller businesses, for example, need to deliver products and services to clients – but even those with limited travel needs bear the brunt of high oil prices when they receive delivered items.
Heating: Wherever you work, you pay more for your fuel when oil prices rise. It’s the unwritten rule that energy firms pass cost increases on to customers much faster than they do cuts. This needs to be considered when you budget the costs of running your business.
Pricing conundrum: The price of any product or service must cover the total amount it takes to produce it, as well as profit margins. When oil prices go up, it costs small businesses more to operate, and therefore they need to consider raising their prices. For smaller firms, this can be a tough decision as they are often reliant on one or two key customers and cannot afford the risk of losing them to a competitor. These firms need to weigh whether they can afford to cut their profit margins or if they must change their pricing structure.
Inflation: Inflation can easily be caused by a rise in the price of oil. This means that even items not directly impacted by oil price rises cost more, driving up the price of rent and other operating costs.
Smaller businesses need to understand that they don’t operate in a bubble, isolated from the wider world. What happens in the global arena matters to everyone, and a ripple effect can make things tighter for even the smallest of organisations. This is the Butterfly Effect played out in the real world: When oil prices rise, a number of costs go up. The smart entrepreneur understands this and factors it into their plans accordingly.
Want more insight on taking your small business to the next level? See How Small Businesses Feel About Growth.