While much of the commentary on Monday’s energy price surge focused on its implications for financial markets and household energy bills, the impact on small and medium-sized businesses is equally significant and perhaps less visible. From restaurants and cafes facing higher gas bills to manufacturers confronting sharply higher energy input costs to transport companies dealing with surging diesel prices, the crisis is being felt across virtually every sector of the economy that consumes energy, which is to say virtually every sector of the economy.
For hospitality businesses, energy costs are among the most significant operating expenses after labour. A restaurant or hotel that uses substantial quantities of gas for cooking and heating is directly and immediately affected by a 40% surge in wholesale gas prices. While the impact does not arrive instantly due to the lag between wholesale price movements and retail tariff adjustments, businesses that are coming off fixed-price energy contracts and renewing at current market rates are facing dramatically higher energy costs. For already thin-margin businesses in competitive sectors, this cost increase can be the difference between viability and closure.
Manufacturing businesses with significant energy intensity face an even more challenging environment. Steel producers, glass manufacturers, ceramics companies, chemical plants, and food processors all require substantial quantities of energy as a direct input to their production processes. Higher energy costs reduce margins, reduce competitiveness against overseas producers who may have access to cheaper energy, and in some cases make continued operation economically marginal. Energy-intensive manufacturers in Germany and other European countries have been through this experience before, during the 2022 crisis, and many businesses came close to closure or made permanent decisions to reduce European production.
Transport companies face the most direct and immediate impact through higher diesel and petrol prices. Road hauliers, courier companies, and logistics operators have fuel costs that typically represent 25 to 35 percent of their total operating costs. A significant rise in diesel prices feeds through directly and almost immediately into their cost base. Many transport operators have fuel cost adjustment clauses in their customer contracts that allow them to pass on a proportion of fuel cost increases, but these mechanisms have limits and the adjustment is often partial and delayed.
For the wider economy, the transmission of higher energy costs through business supply chains ultimately reaches consumers in the form of higher prices for goods and services. Businesses that cannot absorb higher energy costs in their margins will pass them on to their customers. The inflationary effect of the current energy price surge will thus be felt not just in direct energy bills but across the prices of a wide range of goods and services, from restaurant meals to manufactured goods to transport and logistics services. The breadth of the economic impact, reaching through supply chains to touch almost every aspect of economic life, is one of the most consequential dimensions of the current crisis.