The Impact of Rising Gas Prices on Small Businesses

John Thompson is a seasoned energy consultant with a deep commitment to environmental sustainability.

With an Oxford education and over 15 years in the industry, John’s expertise lies in simplifying complex energy concepts to help businesses reduce consumption and save money.

An avid hiker and bird-watcher, John brings his passion for the outdoors into his work.

Navigating the highly competitive business environment poses several challenges for small businesses, one of which is managing the impact of fluctuating gas prices. This comprehensive guide takes an in-depth look at the impact of rising gas prices on small businesses in the UK and offers a detailed analysis of potential strategies for managing these challenges.

In this guide

• Rising Gas Prices
• The Impact of Rising Gas Prices on Small UK Businesses
• Mitigating the Impact of Rising Gas Prices

Rising Gas Prices

Between 2010 and 2021, natural gas prices fluctuated significantly due to a number of factors. In the early 2010s, the widespread adoption of hydraulic fracturing (fracking) in the United States led to a significant increase in the global supply of natural gas, which contributed to a decrease in gas prices. However, these prices gradually climbed back up due to various factors.

There are a few main reasons for the increase in gas prices over this period:

Increased Demand

The demand for natural gas has been rising globally. In the UK, the use of natural gas for electricity generation has increased as the country moves away from coal. Additionally, the growing population and economic development in many parts of the world have led to increased energy demand, driving up natural gas prices.

Geopolitical Factors

Geopolitical issues can affect natural gas prices. For example, tensions between countries that are major producers or consumers of natural gas can affect the supply, transport, and price of natural gas.

Weather Conditions

Natural gas is often used for heating, so cold weather can drive up demand and thus prices. Conversely, mild winters can lead to lower demand and lower prices.

Infrastructure and Transport Costs

The cost of infrastructure, such as pipelines and storage facilities, and transportation costs can also affect gas prices.

Policy and Regulation

Policies and regulations related to environmental concerns, especially those aimed at reducing greenhouse gas emissions, can also influence natural gas prices.

For the most current and accurate statistics on gas prices you can visit the Office for National Statistics.

The Impact of Rising Gas Prices on Small UK Businesses

Heightened Operational Costs

Increasing gas prices often result in a parallel increase in operational costs, especially for businesses that rely heavily on gas for their everyday operations. According to the Office for National Statistics (ONS), the average price of natural gas in the UK has witnessed an alarming surge of over 20% in the past two years. This significant increase in gas prices directly impacts the operational costs for these businesses, thereby thinning their profit margins. Consequently, business owners are forced into making tough decisions—should they transfer the additional costs onto their customers or absorb the financial burden themselves? These decisions could potentially have long-term implications for their business.

Diminished Profitability

Another significant impact of escalating gas prices is a direct hit on profitability. Small businesses, especially those operating on stringent budgets, find their profit margins dwindling as their gas costs surge. This situation can stifle growth and expansion as it restricts the ability to reinvest in the business, hire additional staff, or broaden their operations. A recent survey by the Federation of Small Businesses (FSB) indicates the gravity of the situation—57% of small businesses reported that higher gas prices have negatively impacted their profitability.

Implications for Pricing and Customer Demand

Rising gas prices often force small businesses to revise their pricing structures to compensate for the increased operational costs. However, higher prices could potentially deter price-sensitive customers, leading to decreased demand for their products or services. Thus, small businesses need to strike a delicate balance between maintaining profitability and attracting customers in this price-sensitive market. For example, a local bakery in Manchester that heavily relies on gas for baking would need to carefully assess the implications of increased gas prices on its pricing structure. The aim is to ensure it remains competitive, retains its customer base, and can cover its operational costs.

Mitigating the Impact of Rising Gas Prices: Strategies for Small Businesses

Boosting Energy Efficiency

Improving energy efficiency is a critical initial step that small businesses can take to mitigate the impact of rising gas prices. This could involve regular equipment maintenance and the use of energy-efficient appliances. Research by the Energy Saving Trust highlights that just regular servicing of gas-dependent machinery can enhance energy efficiency by up to 10%. By actively working to minimise gas consumption, businesses can significantly lower their energy expenses, thereby cushioning the financial burden of escalating gas prices.

Exploring Alternative Energy Sources

In addition to optimising their existing energy consumption, businesses should also consider exploring alternative energy sources. This could involve incorporating renewable energy options, such as solar or wind power, into their operations. Alternatively, businesses could also explore more collaborative options, like sharing energy-saving practices with other businesses in their locality. The UK government offers several incentives and grants to encourage businesses to transition to greener energy solutions, making this an attractive option for businesses looking to manage their energy costs effectively.

Implementing Remote Work Policies

Remote work has emerged as a viable alternative for businesses to significantly cut down their office-related energy consumption. If businesses have employees commuting to a central office, the energy consumed in heating and lighting these office spaces can be a considerable operational cost. By allowing employees to work from home or adopting flexible work arrangements, businesses can drastically reduce their dependence on gas for heating and lighting, leading to significant cost savings. Furthermore, remote work policies contribute to a healthier work-life balance for employees, leading to improved productivity and job satisfaction.

Harnessing Technology

In the era of digital transformation, technology can be a powerful tool for businesses to optimise their operations and reduce their gas consumption. Energy management systems, for example, allow businesses to monitor their energy usage effectively, identify areas of wastage, and implement corrective measures. Additionally, online collaboration tools can eliminate the need for travel for in-person meetings, leading to further energy savings. By integrating technology into their operations, small businesses can achieve more efficient energy utilisation and realise substantial cost savings.

Negotiating with Suppliers

An often overlooked aspect of managing operational costs is renegotiating contracts with suppliers. Small businesses could explore opportunities for cost savings by collaborating with their suppliers to secure more favourable pricing or terms. Such negotiations could potentially offset the impact of rising gas prices on the supply chain, reducing the business’s overall expenses. This approach not only leads to cost savings but also fosters stronger relationships with suppliers, paving the way for mutually beneficial partnerships.

Employing Strategic Pricing

In response to higher energy costs, small businesses can tactically adjust their pricing structures. This process involves a nuanced understanding of the market demand, competitor pricing, and customer perceptions. By carefully evaluating these parameters, businesses can find a balance that ensures profitability and competitiveness in the market. This strategy could involve offering bundled products, loyalty discounts, or seasonal offers, all of which can help retain customers without compromising on profitability.

Diversifying Revenue Streams

In times of economic uncertainty caused by fluctuating gas prices, diversifying revenue streams can provide financial stability for small businesses. By branching into new markets, offering additional products or services, or partnering with complementary businesses, they can reduce their dependence on a single, gas-intensive revenue source. For instance, a restaurant experiencing higher cooking costs due to rising gas prices could offer cooking classes, or establish partnerships with local farms to host farm-to-table dinners. By diversifying their offerings, businesses can maintain a steady revenue stream, even in the face of rising gas prices.

Conclusion

The challenges posed by rising gas prices are formidable but not insurmountable. With thoughtful planning and strategic implementation, small businesses can weather this storm. By adopting a comprehensive approach that includes boosting energy efficiency, exploring alternative energy sources, implementing remote work policies, leveraging technology, renegotiating supplier contracts, employing strategic pricing, and diversifying revenue streams, small businesses can navigate the turbulent terrain of rising gas prices.

To stay ahead of the curve, small businesses must actively monitor gas price trends, stay informed about industry best practices, and adapt their strategies to the evolving business landscape. By doing so, they can not only mitigate the impact of rising gas prices but also ensure their long-term success in an ever-changing business landscape.