Four reasons why petrol prices will keep rising

Robert Powell looks at why petrol prices will keep rising at the pump, despite the government's binning of a fuel duty rise...

There was a slither of good news lurking in George Osborne’s Autumn Statement last month. Yes, among all the talk of shrinking growth and snaking spending cuts was the axing of a planned January fuel duty rise of 3p per litre.

The move came after huge pressure from campaigners and MPs alike. Earlier in the month Conservative MP Robert Halfon tabled a Commons motion on fuel prices after an e-petition – launched by the FairFuelUK group – was signed by over 100,000 people.

But the scrapping of this tax hike offers only scant relief for motorists and is certainly not an antidote to soaring petrol prices. Here are four reasons why.

Fuel duty

The planned January rise may have been slain, but fuel duty is still most definitely alive. In fact, a further increase in the tax is still on the cards: 3p per litre in August, although this planned rise was reduced from 5p per litre in the Autumn Statement.

These incessant hikes in fuel duty are a key problem faced by petrol price campaigners as they create something of a ‘swimming against the tide’ sensation. What chance is there of bringing about a slashing in fuel duty when a barrage of rises have to be dispatched first?

It also presents something of a PR problem for fuel pressure groups. “Rise halted” is unlikely to get the pulses of protestors racing. “Fuel tax scrapped” is the real goal.

But while fuel duty makes up a majority of the price you pay at the pump, it’s not the only ingredient.

Middle East unrest

Gaddafi may be gone, but the oil price impact of unrest in the Middle East that I reported on back in March is still taking its toll on the beleaguered British motorist. However, this time it’s the increasing tension levels between the West and Iran that is keeping barrel costs high.

This diplomatic fire was stoked substantially at the start of the month when the British embassy in the Iranian capital of Tehran was stormed by protestors. In response, Iranian embassy diplomats working in London were expelled from the country.

This tension was translated across to the oil markets after reports emerged that EU leaders were considering a ban on exported barrels from Iran. Throughout the month, European foreign ministers have called for new sanctions against Tehran over its disputed nuclear program. The calls come as the U.S. Senate voted to penalise companies that did business with the central bank in Iran.

Iran produces over four million barrels of the black stuff every day and if a ban were to be imposed, global oil prices would undoubtedly balloon. And if this happens, costs at the pump will also rise.

But this direct pricing isn’t the only possible future impact of unrest in the Middle East on fuel costs.


Even if we switch off the Iranian oil tap, supply will not dry up. In fact, figures from the world’s largest oil exporter, Saudi Arabia, paint a fairly healthy market picture. Earlier this month the Saudi oil minister said the country had increased production and was now pumping 10 million barrels a day. As the FT points out, this figure holds something of an ideological significance, as it is a level not breached by the kingdom since the 1979 oil crisis.

But despite this (on paper) huge announcement, oil prices remained static. The reason? Speculators.

I wrote about the impact of market speculators back in August, and little has changed since then. In fact, with the global economy still teetering on a knife edge, the returns available for those betting on the market faltering and flattening has never been higher.

Millisecond-by-millisecond oil market trading (often made by computers) falsely inflates the price of oil by relying on speculation, not real-life supply. And in the context of Eurozone strife and Middle East trouble, speculation is one thing that traders (and their computerised algorithms) have in vast quantities.

Posting on his FairFuelUK blog, motoring campaigner Quentin Wilson points to Iran as a current speculation hotspot: “Traders know that if there’s any conflict round the Persian Gulf then one of the world’s most significant oil shipping lanes could get blocked. The Straight of Hormuz is a choke point and carried 15.5 million barrels of oil a day on 13 massive tankers, adding up to nearly 40% of the world’s oil”.

If the Iranians really want to take a swipe at the Western economy, all they have to do is target this straight.

“With sinister foresight the traders in red braces are betting on some fisticuffs with Iran,” Wilson continues.

But there’s also a further problem.

The dollar

Oil is traded in dollars. And as the Eurozone crisis escalates, the State-side denomination is being pushed higher and higher up. So as the dollar strengthens, one pound will buy less and less oil. In other words the black stuff – and by default petrol – is getting pricier for those of us who pay in sterling.

To go back to an analogy coined by The AA’s Paul Watters: when it comes to petrol prices, the process is one long food chain where the motorist is sat at the end, consistently taking the hit as others profit.

Yes, the government will now be taking a smaller bite of the petrol pie than expected. But don’t expect costs at the pump to fall significantly anytime soon.

What to do

What needs to be done to tackle rising petrol prices?

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