If you're an Australian business owner, you've undoubtedly felt the pinch of rising costs impacting your business - energy bills, wages, supplies - all going up. As inflation drives these expenses further, businesses are looking for ways to adapt. In this article, we'll be explaining what causes these price hikes, why it's affecting your business, and how we can break out of it.
How Did We Get Into a Cost of Living Crisis?
The current surge in rising costs didn't happen overnight. Instead, it's the result of several overlapping factors - both global and domestic - that have built up over time.
The COVID-19 pandemic significantly disrupted global supply chains, leading to widespread shortages and delays. Factory shutdowns, particularly in Asia, caused delays in production and shortages of critical components in industries such as healthcare and automotive. Logistics were also affected, with travel restrictions leading to shipment delays and cancellations, creating bottlenecks in transportation across borders.
These supply chain disruptions contributed to a surge in demand for fuel and energy post-pandemic. As economies reopened, the increased need for transportation and manufacturing led to higher energy consumption. However, the energy sector struggled to keep up due to lingering supply chain issues and geopolitical tensions, further disrupting energy markets
We then experienced higher energy, fuel, and production costs, which led to businesses raising prices to cover those costs. This led to a higher cost of living, which in turn led to higher wage demands from employees to keep up. Further increases in production costs then led to higher wage demands, and vice versa. We are currently in a rising cost cycle. Let's dive deeper into that now.
How Adverse Economic Conditions Affect Energy Prices
One of the toughest parts of business right now is the price of energy. Energy prices have risen over the last few years due to pressures from abroad and here in Australia. These factors aren't operating in isolation - global trends influence local markets, while domestic conditions create additional pressure on energy supply and costs.
International Factors
Many of our energy prices in Australia are due to global economic trends:
- Supply Chain Disruptions: The COVID-19 pandemic led to widespread global supply chain disruptions, affecting the availability of raw materials and energy.
- Increased Energy Demand Post-Pandemic: As countries emerged from lockdowns, demand for energy surged. This rapid rebound outpaced supply, leading to sharp increases in the cost of fuel, gas, and electricity.
- Geopolitical Tensions: Conflicts and political instability in key energy-producing regions, such as Eastern Europe and the Middle East, have further contributed to energy market volatility. These tensions have disrupted the global supply of oil and gas, leading to a global gas price increase.
Domestic Factors
We've also seen a range of factors at home that have led to the rise in energy prices here in Australia:
- Aging Infrastructure: Many of Australia's coal-fired power stations are aging leading to unplanned outages and a reduction in thermal power generation capacity. This has led to increased reliance on gas and renewables, driving up electricity prices.
- A Tricky Transition to Renewables: The push towards renewable energy is necessary for long-term sustainability but it hasn't been without difficulties. As older power plants are phased out, supply gaps during the transition period have caused price volatility.
- Export Commitments: A really difficult issue for Australia has been our position as a leading exporter of coal and gas. As global demand and prices for these commodities rise, local energy producers are seeing greater profit from selling their energy overseas, leading to higher prices for the supply left over in Australia.
- Gas Supply Challenges: Despite being a major gas producer, our supply isn't infinite. This has particularly affected areas like New South Wales and Victoria.
How Energy Prices Are Impacting Small Businesses
Rising energy prices are placing significant financial strain on small businesses across Australia, particularly in energy-intensive sectors. But it's not just energy costs - businesses are being squeezed by rising expenses across the board, including wages, raw materials, rent, and transportation. Here are some of the most affected sectors:
- Hospitality: Cafés and restaurants are experiencing increased costs for cooking, refrigeration, and climate control. This is also being combined with the well-documented food price rise.
- Manufacturing: Higher energy prices are leading to higher expenses to operate machinery and production lines, alongside increased costs for raw materials and logistics.
- Retail: Retailers are dealing with elevated energy bills for lighting, heating, and cooling in their stores, in addition to rising rental and wage costs.
- Agriculture: Farmers and agricultural businesses are among the hardest hit by rising energy prices, especially those relying on irrigation, machinery, and cold storage. Additionally, increased fuel and fertiliser costs are adding further pressure on production.
A survey revealed that 66% of small businesses are adversely affected by rising electricity prices, with 25% stating that increased energy bills have a greater impact on profitability than rising fuel costs or the increased price of trading stock.
What Can Small Businesses Do to Ease the Pressure?
We've spoken plenty about the doom and gloom of it all, but we wanted to include some ways that SMEs can relieve the cost pinch of energy right now.
- Explore Better Energy Deals: This is a no-brainer. Energy prices have risen a lot over the last couple of years without a break in sight. Our energy brokers offer industry expertise and market knowledge, enabling them to secure the most favourable energy contracts for your business. This is turning commercial energy procurement into a key area for all businesses.
- Invest in Renewables: For businesses with high energy usage, renewable energy solutions like commercial solar can provide significant long-term savings.
With time, we hope to see an easing of these financial pressures on Australian businesses. If you'd like to take a proactive approach to your energy bill, get in touch with the team at Choice Energy today for a free energy assessment.
