Over the last few days you may have noticed that petrol and diesel prices have started to fall. The members of the Organisation of the Petroleum Exporting Countries (OPEC) have in recent weeks increased oil production. This has sent the wholesale price of petrol down from £1 to 80p per litre. A Total Car Check will tell you how much it costs to fuel a vehicle.
The 20p fall in wholesale price has actually been happening over the last six weeks. If petrol retailers were to fully pass on the price change this could mean we are looking at more like £1.80 or £1.70 at the pump depending on the area you live.
But this is only likely to bring temporary relief. The West’s rejection of Russian oil exports has yet to kick in to prices. Analysts expect that once this feeds through we can expect a barrel of oil to potentially increase to up to $200 in a worst case scenario. It stands at just over $100 now. There are other reasons why longer term price hikes are here to stay.
Why will we see high fuel prices over the longer term?
Like with the increase in domestic energy prices, there has been a perfect storm of events which have collectively pushed up prices and will do so for the foreseeable future:
- Covid pandemic – the pandemic has played havoc with supply and demand of many goods and services. We needed much less fuel over the Covid lockdowns and when travel restrictions were in place. Once we and other countries lifted restrictions demand shot up very quickly and production of oil and fuel couldn’t keep up. This resulted in price increases before the Ukraine crisis started.
- Investment in oil production – oil is a limited resource and oil companies must keep finding new reserves to ensure demand is met. But in recent years a number of big projects to find oil have stalled. Why? The transition to net zero has made these projects risky. Governments across the world are incentivising renewable energy initiatives and implementing plans to decarbonise fuel and energy over the longer term to help save the planet. Oil supply and production capacity has therefore been constrained which means price increases.
- Relations with Russia – Russia is the third largest oil producer in the world and the second largest gas producer. The measures that the UK, US and EU are putting in place seek to remove Russian oil and gas from their fuel and energy supplies . The longer term aim here is to starve Russia of the finances it needs to fund its ongoing war with the Ukraine. But analysts predict that so long as Russia maintains its plans to gain control over its neighbour it could take years before the war ends and relations begin to improve. Over this time oil and fuel prices will likely be permanently high compared to pre-pandemic prices.
- Inadequate fuel security – the UK, like many other countries, remains dependent on trade for its fuel supplies. We do produce a significant amount of oil and gas in the North Sea but much of this is exported and it is not sufficient for making refined fuels. Moving to power our vehicles using electricity could help remove our dependency on overseas fuel and energy supplies. If we can produce enough electricity in the UK from renewables such as wind, solar and tidal installations then this can be used to charge our vehicles.
Will Government act further to lower fuel costs?
The 5p cut to fuel duty in the Chancellor’s spring statement was gobbled up within a couple of weeks. There is and will continue to be ongoing pressure from voters to implement significant measures to curb the cost of living. The Conservative party Government are losing public confidence following a number of events that have impacted on its integrity. So they will have to start doing more to tackle the crisis and win back the public’s trust and confidence. Neither of the two candidates left standing to be the next Prime Minister have outlined any targeted measures to reduce the price of fuel.
But when push comes to shove the next PM will need to take action given the scale of the crisis facing the UK this winter. So expect some big ticket policies in the Chancellor’s autumn Statement (whoever that may be) in November aimed at providing relief. By this time we will all start feeling the effects of much higher energy prices. A VAT reduction or large impactful cut to fuel duty could be on the cards to help drivers through this difficult period and bring down inflation.