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Oil Prices and Your Commercial Awareness

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About The Author

Krishna Bholah (Guest Contributor)

Krishna graduated in law from the University of Southampton in 2016. He currently works in the business development team of a successful property technology start-up. During his spare time, he actively pursues other business endeavours, including investing in property developments and the stock market.

Image © Arbyreed

The recent fall in petrol prices may have caught your eye, but like me, this may have been for all the wrong reasons. If you drive, you will likely be delighted that your fuel bill is falling. However, have you considered the wider implications of this? By looking further than the obvious, you will discover some far more significant issues that might make you think twice about your views on the price drop. These issues may prove to be of paramount importance to a law firm or other legal practice, impacting on their business in any number of ways.

In this article I hope to demonstrate an alternative or additional method to conduct wider research on commercially interesting topics. Understanding the wider implications of a transaction, event or business decision goes to the very core of commercial awareness. Therefore, by keeping up to date with news stories and asking yourself questions as you go along, commercial awareness develops organically.

It is important to note from the start that law firms do not expect you to know every current issue appearing in the news across every area of law. They would much rather that you possessed an understanding of the wider economic framework with specific examples of issues that may affect their firm. This can encompass those areas that are of personal interest, which will allow you to develop:

  1. Further knowledge in a topic that you find interesting; and
  2. An ability to use this topic in the various stages of applications to law firms.

This makes the concept of commercial awareness less frightening as it becomes a development in knowledge of your own interests. I will explain how to choose a topic and the kind of questions you should ask when researching into the surrounding issues.

Where to Start

The source of your initial idea can come from almost anywhere and without the need for a legal skew. A local television news report on the fall in petrol prices sparked my interest. Choosing a topic that you find interesting is essential. It is difficult to keep motivated to research an area you do not find particularly stimulating. Read an article from ‘Keep Calm Talk Law’ and then consider alternative opinions and maybe draft a reply in opposition to the author’s viewpoint. Make use of the links provided bearing in mind other arguments that you can formulate. This develops a wider understanding beyond being able to just talk about the particular article or news report and the author’s opinion. Instead, you will be able to discuss the issues involved in depth with your own perspective. Completing this may also mature into more than knowledge, such as the creation of a report or published article, as has unexpectedly materialised for myself here (Learn more on how to contribute to KCTL).

Maybe you know of a new shop opening in your area and have thought about what difficulties they may face in the initial period of establishment. This may seem unrelated to your development of commercial awareness for law firms, but can open up the scope to several relevant discussions. Discovering one area to investigate will often lead you to other considerations. Whilst there are some key differences between the considerations of a shop and a law firm, many of the fundamental issues will be the same or similar. For example, the following questions may arise: 

  • What considerations do a law firm make when deciding whether to establish a new office?
  • What are the particular challenges that a law firm may face in opening a new office?
  • What are the possible implications for new and existing clients?
  • What approach to expansion do law firms of your interest take? Are they known for takeovers?
  • What are the different approaches to expansion taken by local and regional/national law firms when compared with international law firms?

These ideas can then be tailored to the types of law firms you are applying to. For instance, there has been an increase in the prominence of national law firms opening offices in various locations other than London, increasing their geographical coverage. With London being an arguably saturated area, there is an opportunity for regional firms to act quickly and expand to take a first-mover advantage. While for international firms, this may be a threat if clients from the UK seek a more competitive rate from outside of London.

Oil Price Stability?

To illustrate, I outline my own case study conducted and the considerations I made. Knowledge of historical and current global prices of oil, while useful, is not commercial awareness. The concept entails a deeper understanding of the wider implications that the price fluctuations have on the economy. It is for this reason that commercial awareness cannot be simply gained in reading the news a few weeks before an interview. The issue of falling prices of oil is a particularly recent example with long-term effects that have not yet been felt. Thus, the discussion is open to speculation and unanticipated change. The possible effects are notably wide and therefore this is a great topic with ample scope for discussion.

The Importance of Oil 

In an age of increased consumerism but continually increasing levels of environmental damage, the implementation of viable alternatives to non-renewable resources is at its most needed. Despite progression in understanding of the issues posed and developments of environmentally friendly alternatives, the fact remains that the majority of energy is produced by coal and gas. Such a backdrop strongly identifies the continuing reliance on the use of fossil fuels across the globe. Fuel for transport in the UK is the second most common use of oilyet the transport sector is an industry that remains largely unaffected by the attempts to make our consumption “green”. For example, only 2.3% of cars in the UK use alternative methods to petrol or diesel. This demonstrates that oil remains an essential commodity and therefore a long-term fall in the price can have a significant impact on the economy.

Concerns for the Economy

Commodities such as oil play a key part in the day-to-day lives of people, and the trading of businesses. A lack of price stability in vital commodities creates uncertainty, which can have extremely damaging effects on the economy.

In July 2014 the average price of Brent Crude oil hovered around $110 per barrel. In October 2014, Andrew Critchlow for the Telegraph reported concerns for oil producers when the price was anticipated to go below $80 per barrel. Oil prices have now fallen as low as $50 a barrel. Whilst commentators such as Critchlow were predicting a fall in oil prices, they did not envisage what can only be called a crash in prices, with some prices dropping by over 50% in just six months.

There are also concerns that falling oil prices are going to create a significant amount of deflationary pressure on the economy. A drop in petrol prices reduces the production and transportation costs of goods, which if passed on to the consumer can encourage the deferral of spending. By deferring spending, further deflationary pressure is created, and thus the economy can enter into an extremely damaging downward spiral.

With inflation as low as 0.5% in December 2014, there is little room for manoeuvre and a severe risk of market deflation, which could ultimately culminate in another depression. The Great Depression of the 1930s provides an excellent example of the damaging effects of deflation, and the extreme social consequences it can have. Whilst it may seem like consumers are getting a good deal through lower prices in the short run, the long run is a much bleaker picture.

Causes of Plunging Oil Prices

In order to make sense of the fluctuations in the economic cycle, you must consider the causes. By being able to assess what has caused the economy to rise and fall you will develop a good understanding of commercial issues that affect businesses, including those in the legal sector.

Like most fluctuations in the price of commodities, there is no single cause. As per the classic supply and demand diagram, where there has been a significant increase in supply of any good or service in a competitive market, the price will fall due to less competition. Likewise, a decrease in demand creates less competition for the current supply, resulting in a fall in prices.

Some of the main causes of the recent oil price drop include the increased production of oil in the American market through Shale oil extraction and the reducing demand from China. These factors together have meant that supply has outstripped demand by a wide margin thus causing a severe price drop. Other factors have also contributed to the fall in prices such an increase in exports of oil from Libya as the civil war tensions begin to ease.

In order to provide ‘fair and stable prices’ the Organization of the Petroleum Exporting Countries (OPEC) was created in 1960 and is currently made up of twelve of some of the largest oil-producing countries. This includes the United Arab Emirates, Qatar, Iran and Iraq. They operate as a cartel by controlling their supply of oil in reaction to any changes in the economy affecting the price. However, not all major producing countries are members of OPEC, notably Russia and USA. OPEC are currently refusing to reduce supply to balance the price fall and negotiations with non-members have failed in a battle to retain market share. This has let the market price continue to drop without action from OPEC to help maintain the price. 

Possible Impact on Law Firms 

For those countries that are heavily reliant on the oil market for their economic growth, households and businesses are likely to be negatively affected. For example, those States in USA that are particularly reliant on oil production for their economic growth will find it harder to make profit with a lower average sale price. This means producers utilising more expensive extraction methods may need to reduce costs to remain in operation. If they are unable to do so, producers will have to cease plans to expand, reduce their current operations and even possibly close down.

Concerns have also been raised in the UK about the viability of oil production in the North Sea with BP already reducing their number of employees in order to cut production costs. This will lead to a fall in employment rates and increase government costs such as unemployment benefits. Thus consumer spending will fall, impacting surrounding businesses. This affects the quantity of work a law firm may get in particular practice areas including those firms not specialised in the energy sector.

Corporate departments – May experience a general fall in demand for advice on Mergers & Acquisitions if investment is down. Nonetheless, there may be oil producers looking to merge in order to reduce their costs through improved economies of scale.

Anti-Trust/Competition Law – In addition, if mergers take place between oil producers with a significant market share, there may be competition law issues. For example, there is a risk that the newly formed producer charges excessively high prices to increase profits. Alternatively, they may use predatory pricing in order to drive competitors out of the market. Law firms therefore may need to resolve these issues when advising on a merger.

Insolvency practitioners – Are likely have an increase in instructions where oil producers are unable to continue in business. This applies equally to other businesses unable to survive the downturn of the economy.

Commercial contracts – This area of law may have a slight negative impact, with less contracts being drafted for investments in the oil industry and businesses in general. However there is also potential for re-negotiation of contracts in reflection of the changing economy.

Construction – A lack of construction projects from oil companies and other businesses setting up or expanding is another probable consequence due to the collapse of the oil industry.

It can be seen there are various different opportunities and threats to all types of law firms and the areas of law they practise in as a result of the fall in the price of oil. The analysis I have provided above, however, relies on speculation that the price drop will have a negative impact on the economy. With no complete certainty of this, it is important to note that commentators have also predicted economic growth from the price change. The likely impact on the UK economy may be positive due to being more dependent on importing oil. They can therefore benefit from purchasing the commodity cheaper. Businesses can sell their products at a cheaper price or have greater profit margins, which can then be used for investment. Consumers on the other hand, can increase their spending with money saved on fuel and purchase cheaper goods if they are sold at a lower price. Accordingly, these are ramifications that are not as bleak as those explained above in regards to law firms. Acknowledging these outcomes and describing the possible effects to the general public and to law firms demonstrates a sophisticated level of commercial awareness.

Conclusion

In summary, it is important to understand your own genuine interests before you research and draft applications for law firms’ vacation schemes and training contracts. Knowing which areas of law you take interest in can be difficult where you have not experienced the area in practice. Despite this, you can have a feel for those you are likely to enjoy by considering the news that draws your attention and wants you to question and investigate further. As this article shows, the possibilities are endless despite the initial spark being seemingly trivial.

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Tagged: Commercial Awareness, Competition, Legal Careers

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