The price of oil has hurtled well past the $100 barrier and sits above $106 on Monday morning – a surge in price of well over a third (37 per cent) in the space of a week, something which promises a big impact on people’s finances.
What we refer to as oil is typically the contract price of Brent crude – a global benchmark for pricing of the commodity regardless of its origin. Brent crude comes from the North Sea. Its price rises and falls in line with supply and demand for oil as a whole, not just of its own type.
Rising oil costs will naturally push energy bills higher, but it’s far from just about turning the heating on – higher fuel costs impact manufacturing, transport, food and everything else.
The longer that the price of oil is high, the more difficult it is to absorb those spikes, making it more likely they will feed through into the cost people pay at home. Ending the situation in the Middle East is therefore the limiting factor on how high bills might go.
“You never know exactly the timeframe of this, but, in the worst case, this is a weeks not a months thing,” US energy secretary Chris Wright said yesterday. But the longer it goes on, the more likely it is that prices remain higher afterwards.
So what do you need to know and what’s going to go up?
Petrol
Chris Wright was specifically talking about the price of petrol at US gas stations, but if matters are settled soon with Iran, the same principle applies in the UK. However, there is a lag to be aware of.
Part of the issue is not just the hampered supply now, but the fact that storage quickly becomes a problem too, so oil-producing nations cut their output. Then, once oil is flowing again, it takes them time to ramp production back up to normal levels, leaving a scarcity in the meantime and prices staying higher as a result, even once tankers can move again.
Iran has cut its oil output drastically, only now producing a quarter of what it was before the first US strikes fell.
“This is roughly 3 per cent of global oil supply lost in a single event. Shockingly, this is worse than the oil supply situation after Russia attacked Ukraine,” noted XTB research director Kathleen Brooks.
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On Friday, the RAC reported the average price of a litre of petrol at UK forecourts as 137p, rising nearly 4p since conflict in the Middle East resumed.
Inflation and interest rates
The data we get from the Office for National Statistics (ONS) is naturally backward-looking and lags a month, so we won’t know what the impact of right now is until further down the line.
But generally speaking we don’t need to know the specific numbers: if costs go up of energy, raw materials or labour, prices go up in response. Prices going up is inflation.
How much of an inflationary impact the Middle East situation has is the important aspect. Inflation has been on a downward path in the UK over the past year or so but this is likely to derail the expected route back to the target of 2 per cent, which some analysts had predicted would be met by early Spring.
If prices start to surge again, one of the key measures the Bank of England has to control inflation is to raise interest rates.
As the cost of borrowing increases, firms and households spend less and borrow less, reducing demand for certain services or products and therefore helping to prevent prices from rising any higher.
However, matters are complicated in the UK due to a weak economy and rising unemployment, which higher interest rates could harm even further.
