Brexit Impact on Oil Market

Britain’s vote to leave the 28-nation European Union not only surprised fellow European countries, but it also sent economic shockwaves through world markets. Energy markets were not immune to this shock and they faced sharp decline in oil and gas prices.

Given the profound economic consequences of Brexit, the oil market is forecast to continue to be under impact.

This article aims at reviewing the short and long-term impacts of Brexit.

Post-Brexit Oil Market Scenarios

It seems that Britain’s historic vote to leave the European bloc after nearly five decades has given rise to two major scenarios for oil market.

  1. Long-Term Impact on Oil Market: Based on this scenario, as Brexit inflicted shocks on the energy market in the short term and pushed oil prices down, it will be able to leave such an impact in the long-term too. In such a scenario, world markets will remain shocked over Brexit for some time. Several important factors strengthen this scenario:
  1. -Uncertainty about Britain Future: Brexit will in the long-term bring about divergence between Britain and Scotland, Wales and North Ireland. Most Scots and Welsh favored remaining in the EU and there has been deep-seated divergence between these countries and England. Therefore, Britain’s decision to break away from the EU may bring about Brexit on a smaller scale inside Britain. If the logic of Brexit supporters is accepted, other parts of Britain may opt for separation from the United Kingdom. For instance, Scotland’s National Party had warned ahead of Brexit vote that if Britain votes in favor of Brexit while Scotland chooses to remain, Scotland will reluctantly leave the European bloc. That could provide the ground for a new independence referendum.
  2. Uncertainly About Britain-EU Future Interaction: Article 50 of Lisbon Treaty stipulates that a vote for leaving the European Union means there is no possibility of returning to the bloc unless all member states give the nod. Therefore, Brexit will prompt the Union to reconsider its interactions with Britain. Until now, Britain had access to Europe’s single market without even paying tariffs. After Brexit is formalized, Britain’s trade with EU member states will cost higher, as tariffs will be introduced. Furthermore, since most European leaders particularly German and French leaders favored Britain’s remaining in the European Union and are now unhappy with Brexit the relations between the EU and Britain are likely to turn sour in the future. That could give rise to tensions between the two sides and leave significant impacts on global oil markets.
  3. Uncertainly About EU Future: The European bloc will experience important changes following the Brexit vote and it may even lead to total disintegration. It is possible that other member states that are unhappy with certain EU regulations would follow suit and choose to leave the bloc. Such a mentality already exists in some EU member states. In the wake of Brexit, nationalists in France, Germany and Italy have also called for referendum on leaving the Union. Such a process, which would continue until full collapse of the Union, will definitely affect energy markets in the world.
  1. No Long-Term Impact on Oil Market: Based on this scenario, Brexit may give short-term shocks to energy markets and result in oil price decline; however, no long-term impact on the oil market is likely to happen. Under this scenario, the markets in the world will be back to normal situation after getting fully familiar with developments in the market. Several factors are involved in this scenario:
  1. No Serious Change in Energy Demand: The oil market is more than ever under the impact of market regulations as well as supply and demand; therefore, Brexit will not decrease demand for energy. Even if Britain’s gross domestic product (GDP) falls 2% in reaction to the vote, demand for oil in England will decline by 1%, or 16,000 b/d, which is equivalent to 0.016% of global demand. That is meager and will not affect the current level of demand. Therefore, no significant volatility will be seen in oil demand to be able to affect the prices.
  2. Well Thought-Out Brexit: Since uncertainty about the way Britain decided to leave the EU could give rise to political and economic consequences for European countries, the procedure of Brexit is set to happen quickly and under a well thought-out plan. Therefore, world markets will not remain in uncertainty for a long time and they will recover shortly.

World Markets Perspective

The Brexit vote does not necessarily mean its quick formalization. The procedure will start for Britain to leave the Union, but the country will still remain in the bloc for some time. It must be also noted that leaving the EU is not an automatic procedure and it must be negotiated with other member states. All throughout the Brexit procedure, the European Parliament may veto any new agreement about relations between Britain and EU.

Therefore, negotiations about the Brexit procedure and the nature of bilateral relations will not be limited to the reversal of the European Communities Act (adopted in 1972). It will also affect more than 80,000 pages of EU contracts that have been adopted over the past five decades. The European Communities Act 1972 (is an Act of the Parliament of the United Kingdom providing for the incorporation of European Union law (originally Community law) into the domestic law of the United Kingdom.

In fact, Britain and EU should decide about which agreements they will rescind, change or maintain. Negotiations on these issues may last years, even decades. However, some analysts believe that lack of access to Britain’s consumer market will not benefit Germany and France negotiations about a new trade agreement are likely to pay off soon.

In any case, after the Brexit takes effect Britain will no longer be bound to the EU agreements and then one can talk about the future of world markets in the energy sector. For the moment, it could be predicted that energy markets in the world will experience shocks in the short-term, but the conditions will be back to normal very quickly. As far as the long-term impacts of Brexit are concerned, the future of this procedure and its consequences must be taken into consideration because materialization of any scenario may bring about major changes in the oil market.