April 20, 2020, will go down in history as the first time the price of a barrel of oil crashed below zero. A price war between Russia and Saudi Arabia, compounded by the unexpected impacts of coronavirus, sent the value of oil spiraling in mid-February.
So how could this happen? How is it possible for one of the world’s most in-demand commodities to have a negative value?
While traders and economists will likely be arguing over the finer points of the crash for years to come, it ultimately boiled down to one thing: producers ran out of storage facilities. Oversupply meant that traders didn’t have anywhere to store the barrels of oil they were obliged to take delivery of, prompting them to take drastic action and drop contracts as quickly as possible.
5 Small Business Lessons from the 2020 Oil Price Crash
So what does all this mean for small and medium-sized businesses? In this post, we’re going to take a look at five key points.
Lesson #1: Taxpayer-Backed Loans for SMBs Went to the Fossil Fuel Industry
One startling discovery that has emerged during the crisis is the way in which taxpayer-backed loans intended for SMBs have been funneled to big players in the oil industry. Texas company Battalion Oil, for example, received a $2.2 million relief loan from the US government despite having gone bankrupt twice in the last four years.
Understandably, people are angry, with many thinking that money allocated to struggling companies has instead been handed to already-floundering big businesses.
A review conducted by UK newspaper the Guardian in conjunction with investigative research group Documented shows that $113 million in loans meant to support small enterprises has been diverted to oil firms.
Lesson #2: High Risk Investment Isn’t for Everyone
Many non-professional investors were eager to profit from the volatility in the oil market.
But was it a good idea? Futures trading, which requires large amounts of knowledge at the best of times, became even riskier in the days and weeks after the crisis. And this applied just as much at a company level as it did at an individual one.
The problem wasn’t just the inherent instability of the oil market, which was arguably at its most chaotic. The main issue was that many of the long-term ramifications of the April crash hadn’t made themselves known. And the industry is still likely to see more bankruptcies even now. Countries with economies that rely heavily on oil, like Saudi Arabia and Russia, were left in pretty bad shape, situations further worsened by coronavirus.
Lesson #3: Falling Oil Prices Might Actually Be Good News for the Global Economy
Many small and medium businesses have been left wondering how the oil crash might impact the broader global economy and, as a consequence, their own trade.
Fortunately, it’s not all doom and gloom. Some commentators have suggested that low oil prices might be a good thing, especially in the short-term.
Lower import costs usually lead to faster economic growth, something which is sorely needed as the world emerges from the pandemic. What’s more, oil is inextricably interwoven into the global economy, which will likely mean a knock-on effect on the price of a range of goods.
It’s important to keep in mind that the longer-term outlook among traders is more positive, and futures contracts set to expire at future dates are being sold for higher prices.
Lesson #4: Diversified Small Company Assets Have Always Been a Good Investment Strategy
If, as a small or medium-sized business, you’re heavily invested in oil-related industries, now is a good time to diversify your portfolio.
Portfolio diversification of company and pension investments has always been prudent from a financial perspective. And if there’s one thing that coronavirus has shown, it’s that many supposedly safe investment opportunities carry much greater risk than previously thought.
A diverse portfolio is one of the best tools that companies have for limiting risk. Investing in a mix of assets, such as stocks, property, bonds, commodities, and so on, should be a priority as SMBs formulate contingency strategies moving forward.
Coronavirus has also reignited interest among consumers in the ethical integrity of the companies that they use, with the oil crash acting as a catalyst. Now is a good time to consider your value proposition in regards to your company assets.
Lesson #5: Even Negative-Value Oil Doesn’t Lead to Free Petrol
On a less serious note, many company owners and managers were expecting the oil crash to have a significant knock-on effect on the price of everyday items like petrol.
Consumer and business prices for oil-related products aren’t determined by the base price of a barrel of oil. There are other costs involved, including refining, distribution, packaging, etc. While slightly lower prices are likely, you shouldn’t count on pumping stations offering petrol for free just yet.
If there’s one thing that both coronavirus and the historic April oil crash have proven, it’s the fact that good financial management is essential to small and medium businesses. Many companies will shut down as a result of what’s happened over the last few months. And an even greater number will struggle to get back on their feet.
Contingency planning is the best way of preparing for unexpected crises. Companies that have built large reserves and a diverse investment portfolio are more likely to survive downturns, crashes, pandemics, and any other negative market-impacting events. What’s more, they’ll be better placed to take advantage of new opportunities when things return to normal.