The Strategist

What links Brexit and Saudi Arabia oil industry?

02/20/2017 - 15:15

The Brexit referendum resulted in depreciation of the pound sterling to its lowest level in more than 30 years, affecting not only the United Kingdom companies, but also their partners. In particular, Saudi Arabian oil producers may experience problems with purchase of the necessary equipment, or to shift to European suppliers due to rising prices.

David Dixon
David Dixon
Record low exchange rate of the pound sterling, coupled with other economic results of the Brexit referendum, began to affect British companies connected with the oil industry in the Persian Gulf.

Karim Fatehi, Head of British supplier of high-tech equipment (including drilling rigs parts, filters and air compressors) United Corporation, said he fears a significant increase in prices for supply of materials.

The United Corporation said that about 85% of purchases occur in the United States and Europe, so weak pound sterling could negatively affect profits, says Business Insider.

According to Bloomberg, the pound has fallen from 1.4877 to 1.2465 against the dollar from June 23, 2016. "Eight out of ten providers have sent us information letters with notification of price increase due to release of the UK from the EU. This hasn’t created serious problems for us so far, as we have stocks of essential products, bought in the fall. But we are limited in expansion of business and attracting new customers, although more recently we planned cooperation with Iranian companies after lifting of sanctions from this country ", - adds Karim Fatehi. His company works with the largest oil corporations, like Kuwait Oil Company, Qatar Petroleum and Saudi Aramco. 

If British companies cannot meet needs of Saudi Arabian companies, the latter will have to swing to suppliers.

In late January, Prime Minister of the United Kingdom Theresa May published a so-called "White Paper". This is a plan to leave the European Union, which announces refusal of the idea of a common market and free movement of people. Nothing changed since then as the 50-th article of the Lisbon Treaty has not been activated. However, it is going to happen in the near future, the business will face hard times.

According to Karim Fatehi, his clients prefer to work with London, as the city is the major financial center. Yet, termination of membership in the EU may shift priorities of these customers to continental - German or French - companies. In addition, customs agreement, which the British Government is about to renew separately with all the members of the European Union, can make the supply chain more expensive. Document flow with the new rules will require new employees, which, in turn, will be reflected upon the final price. If the same equipment can be purchased more cheaply in Europe, customers won’t hesitate to find a supplier with more preferable conditions.

"Uncertainty around Brexit "plunged the whole nation, including me, in the darkness,"- says Karim Fatehi.

Immediately after announcement of the referendum results, some analysts pointed out that the weakening of the pound sterling, on the other hand, would be beneficial to Saudi companies. "The fall of the pound will make the dollar stronger than ever. Given that the riyal is pegged to the dollar, it will reduce price for us to import from the UK ", - said Chief Economist of Al-Ahly banking group. John Sfakianakis, director of research at Gulf Research Center, pointed out that the recent shake-up on the market is only explained by investors' tendency to risk aversion. "In the long term, however, effect of this event will be greatly offset, if not disappear".

However, James Reeve, Senior Economist at Samba Financial Group, warned that strong dollar will reduce world oil prices. Saudi economy proved verity of this statement in last September, when the country’s central bank declared a need to maintain financial stability.