Monday, 12 April 2010

Price of petrol soaring

Anyone who has visited a petrol station recently will have noticed that fuel is the most expensive it has even been - at least over a sustained period of time. A litre of unleaded currently costs around £1.20 in the South-East of England, and quite a bit more in rural areas.

And yet oil is not the most expensive it has ever been. Today a barrel of crude would set you back $85, back in April 2008 oil reached $120 a barrel and yet the pump-price of litre barely touched one pound. What's that all about?

It's simply explained. Back in April 2008 you could buy $2 for £1 but today you'd only get $1.50 for your pound, and oil is priced in US dollars. (The government has also put a couple more pence on the fuel duty since 2008.)

So if oil goes back to $120 a barrel then it's easy enough to calculate the pump price you will be paying: £1.70 per litre!

And that's assuming the pound holds its value vis-a-vis the US dollar. But the relative value of currencies is a function of 1) confidence in the national economy, and 2) interest rates. The UK base rate seems locked at 0.5%. Just last week the Bank of England voted to keep it unchanged yet again. The Americans on the other hand seem likely to be raising interest rates in the near future.

The pound has been as low as parity with the dollar. So imagine a conjunction of the peak oil price and the trough sterling value: £1 worth $1 and oil costing £120 a barrel. Your petrol price at the pump is then £2.60 a litre! Oh, and there's no real guarantee that oil won't break through $120 and head on all the way up to $200 a barrel - some commentators are expecting that to happen this year because the global economic slow-down of the last three years has suppressed demand and masked out the effects of an acute world oil shortage. Once the world's economy gets back into gear it will start demanding more oil.

At £2.60 for a litre of petrol many people would make a loss just by commuting to work.

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