What’s driving petrol prices higher
British motorists are once again paying more at the pumps after being hit by one of the largest monthly fuel price hikes in over 20 years last month.
The average cost of a litre of petrol rose by 7p in August while the cost of diesel rose by 8p a litre.
That diesel and petrol prices have – since July – been creeping up again “comes as a big shock to drivers” says Simon Williams, the RAC’s fuel spokesman, because “they had grown used to seeing far lower prices than last summer’s record highs.”
The energy market has certainly been on a rollercoaster ride over the past couple of years. During lockdown, a dramatic drop in demand for diesel and petrol saw pump prices plummet. Then a re-opening, paired with war in Ukraine, led them to almost double in price, reaching record highs last summer of nearly £2 a litre. Since then, fuel prices have fallen significantly but now they are on the rise again, surpassing £1.50 a litre.
Pump prices are creeping up again because the price of crude oil is rising.
This is largely because motorists are at the mercy of an unregulated group of 23 oil-producing nations, who want prices to stay elevated – and are taking action to realise their ambition.
Back in April, Opec+, the Saudi led alliance which includes Russia, agreed to slash crude oil production by more than 1.6 million barrels a day through the end of the year. These cuts were a response to fears that a global economic downturn would dampen demand and see global prices fall.
Given that Opec+ accounts for around two fifths of global oil production, any decision to reduce output has a big impact. Indeed, as Ian Stewart writes in Reaction today, oil prices have risen almost 20 per cent in the last three months. And the alliance is expected to announce this week that it will be extending its production cuts to October in an effort to keep prices high.
The good news is that a steady increase in US oil production in the coming months could ease some of the supply tightness, limiting further significant gains in price.
Outages at oil refineries across the US have also contributed to recent supply squeezes but, according to Russell Hardy, chief executive of Vitol, the world’s largest independent oil trader, refinery maintenance means global crude oil supplies are expected to improve in the next six to eight weeks.
Motorists will hopefully also be shielded more than this time last year thanks to recent regulatory scrutiny on pump prices.
Although last year’s record high wholesale fuel prices left stores with little choice but to increase prices at the pump, a July investigation by the Competition and Markets Authority (CMA) also found that, on top of this, most garages and supermarkets were choosing to inflate their profit margins. The average annual supermarket margins on fuel increased by 6p per litre between 2019 and 2022 – equivalent to £900m in extra costs for drivers.
Fuel retailers have now agreed with the CMA to introduce a scheme enabling motorists to compare live fuel prices online – which could stop fall prices from rising much higher.
Rishi Sunak will certainly hope this is the case. Falling fall prices have been a key factor in helping him edge closer to his pledge to halve inflation by the end of the year.
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