Commodity Trade Mantra

How Will Brexit Impact the UK’s Oil and Gas Markets?

How Will Brexit Impact the UK's Oil and Gas Markets?

How Will Brexit Impact the UK’s Oil and Gas Markets?

The eyes of the world will be focused on OPEC on 25th May, as the group meets to discuss the state of the global oil market. More specifically, OPEC is expected to refine and extend the production cuts that were first implemented in November. This may come as a surprise to some, as the impact of record production and exemption of some prominent OPEC members meant that prices only rallied temporarily before meandering downwards once again.

From the perspective of the UK, however, the decision of OPEC and its next moves will be relatively unimportant compared to the potential impact that Brexit will have on the nations’ oil and gas operations. This is something that has become a key area of focus among Britain’s energy experts, with the association body Oil and Gas UK having recently written a letter to Prime Minister Theresa May highlighting their concerns.

With Article 50 having already being triggered, however, everything now rests on the government’s ability to strike a favourable deal with their European counterparts.

The Impact of Brexit on the UK’s Energy Market: What is the Issue?

While resources such as ETX Capital continue to highlight the devaluation of the pound (GBP) and the impact that this has on day traders and the economy as a whole, the level of concern surrounding Brexit and the UK’s energy market is slowly rising. The situation has been exacerbated by the details of a North Sea industry report, which suggest that Britain’s oil and gas trades bill could almost double to £1.1 billion per annum in a worse case Brexit scenario.

This news has come at the worst possible time, with tension growing between EU and UK representatives ahead of the exit negotiation process. The prospect of the UK leaving the EU acrimoniously and without a viable trade deal has therefore sent energy experts into a panic, as this would almost certainly force Britain to revert to World Trade Organisation (WTO) rules until they were able to agree independent deals with European and Commonwealth nations. It is this that would increase the cost of oil and gas trades, which currently sits at an estimated £600 million each year.

The Flip Side: Why There is Room for Optimism

The polarising nature of Brexit means that there is always an alternative perspective, and one that it is diametrically opposed to its rival. In this instance, the same study has suggested that the UK could actively slash the total cost of oil and gas trade by around £100 million in the best-case scenario, by negotiating minimal tariffs with the Union and securing equally progressive deals with the U.S. and nations of the Commonwealth. The fact that 90% of oil and gas workers are UK nationals also helps, as this minimises complications regarding labour and the freedom of movement.

There are a large number of ‘ifs’ in this argument, however, as it seems increasingly unlikely that the UK will be able to negotiate competitive EU tariffs without maintaining the freedom of movement between borders (Theresa May has already ruled this out as she pursues a so-called hard Brexit). Not only this, but the UK must also attempt to strike a progressive deal with protectionist U.S. President Donald Trump, who will strive hard to forge an agreement that reflects America’s best interests only.

The Last Word

Even when dealing with the globalized nations of the Commonwealth (such as Australia), the UK may find it difficult to secure competitive tariffs once it has left the EU. After all, it will have minimal leverage at this time, and other nations may seize on this to drive relatively hard and unfavorable bargains.

This has yet to be determined, of course, but it appears far more likely that the cost of the UK’s oil and gas trades will rise significantly in the wake of Brexit. This remains one of many small elements that underline the danger posed by Brexit, while it is something that could yet strike a huge blow for a perennially lucrative market.

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