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By Richard Evans
Alarm bells have been ssent ringing in recent months as petrol prices soared to over £1 a litre. With the price of oil rising, experts warned that prices at the pump could reach as high as £1.18. In the past seven weeks, however, oil prices have fallen from $70 to $61 a barrel. As a result, supermarket giant Asda has decided to cut the price of petrol and diesel to 99.9p a litre. Asda, having the widest geographical spread of pumping stations in the country, is regarded as the barometer for prices, so the move means it is highly likely the likes of Tesco and Sainsbury's will follow suit. But how long will prices stay below £1? Not long, most experts conclude. Even if oil prices remain low, planned rises in fuel duty - which already accounts for two thirds of what we pay at the pump - will mean we are likely to pay more, not less, to fill up. Still, the price of crude oil remains the biggest problem. Having already risen sharply from lows of around $30 a barrel early this year to over $60 now, analysts at banking giant Goldman Sachs are predicting a price of $85 by the end of this year, and $95 a year later. How are petrol prices calculated? Now the rule of thumb is that every $2 per barrel change in the price of crude oil translates to approximately 1p per litre in the price of petrol at the pump. If Goldman Sachs is right, this would add about 11p a litre to the petrol price by Christmas and 16p at the end of 2010. Then there's the tax. On top of that, the temporary reduction in the rate of VAT from 17.5 per cent to 15 per cent is due to be reversed on 1 January 2010; this will add about another 2p a litre at current prices. This would be a savage rise from the recent low of 86p seen on January 5 this year, according to figures from the AA, and just a whisker away from the record price of 119.7p seen in July last year after crude oil hit a peak of over $140, according to the AA's survey of average prices around the country. How much does the oil price affect the price we pay? The exchange rate between the pound and the dollar also complicates the relationship between the price of crude and the cost of petrol and diesel. Oil is priced in dollars, regardless of where in the world it comes from, so if the pound rises against the greenback, as it has recently, the cost of crude oil in sterling terms goes down. So is Goldman Sachs right? Short answer: no one can say - predicting with certainty where markets will go is beyond most mortals, even Wall Street's finest. But there are arguments on both sides. The factors pointing to a rise in the price of oil include China's rapid expansion and insatiable appetite for commodities, the fact that new discoveries are struggling to keep pace with demand and political uncertainty in oil-rich areas such as Russia. On the other hand, economists would always expect demand for commodities to fall in a downturn, bringing prices down in turn. A dramatic rise in the oil price risks suffocating any recovery and so preventing a surge in demand for basic commodities, including crude. “A severe jump in the oil price such as Goldmans are predicting would break economies,” says Mr Bosdet of the AA. “A rise of 10 per cent would be pushing it too far. Petrol at 110p could be the breaking point - that's where the economy cracked before. A rise of about 5p to 105p would be our worst case estimate.” He adds: “Speculators are up to their old tricks, trying to talk up the oil price. But the ability to survive another bubble is lessened now, as the world has changed - credit is harder to come by, there is less easy money sloshing around.” Mr Bosdet says a more likely price at which petrol could stabilise is about 90-95p. What will happen if the oil price soars? Here are some of the possible effects of a dramatic rise in the price of crude.
1. Car use and consumer spending. High petrol prices are already causing motorists to drive less, according to AA research published last week. The organisation called on the Government to scrap increases in duty. “Forcing drivers to switch potential high street spending into paying for fuel is hardly the way to stimulate a consumer-led recovery,” said Edmund King, the AA's president.
2. Gas and electricity prices. Although the price of domestic gas has historically been linked to the cost of oil, industry experts say there is such a large gap between retail and wholesale gas prices at present that they can't see householders' bills rising.
3. Inflation and interest rates. A sharp rise in petrol prices could fuel inflation and affect the Bank of England's ability to keep interest rates low. Higher inflation would push petrol prices higher still because the next rise in duty will be linked to the Retail Price Index. How can you protect yourself - or even gain - from high oil prices? Pay as little as possible by using websites such as www.petrolprices.com . Watch how the market works in your area. For example, as Yahoo! reported last year, the presence of an Asda filling station can often bring prices down locally, as the chain sets one competitive price for the whole country. If you want to offset higher motoring costs by looking for investment gains when the oil price rises, there are a number of ways to get exposure. You could buy shares in oil companies such as BP and Shell or in smaller suppliers to the industry; there are also energy funds run by asset managers such as Schroders and Invesco, while oil exchange-traded funds provide (in principle at least) direct exposure to the price of oil. Remember the investment watchwords: consider all your goals as an investor, build a balanced portfolio and think about taking expert advice. Useful links: |
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