An agreement by Opec members to cut the oil supply by 1.2 million barrels per day between them saw oil prices rise dramatically early this morning – and UK motorists are due to bear the brunt of this to the tune of £5 per tank for the average sized family car.
This is the first oil supply cut in eight years. It is a direct response to two years of low oil prices, thanks to a number of factors, one of which being that America no longer imports so much oil from foreign countries.
Another factor for the continued low prices is geopolitics - for example, it’s believed that Saudi Arabia has been happy to soak up a price shock if it harmed Russia (which is not a member of Opec) and Iran. In fact, this new agreement has arrived despite widespread belief that disagreements between these countries would scupper the deal.
Opec stands for ‘the Organization of the Petroleum Exporting Countries’, and its current 13 members are: Algeria, Angola, Ecuador, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the UAE and Venezuela. The 14th member, Indonesia, which re-joined the group less than a year ago after leaving in 2009 (and having first joined way back in 1962), has suspended its membership again, saying that it can’t agree to the new production cuts. Together these countries produce a third of all the world’s oil.
The goal of the organization is to “coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers”.
How will this affect me?
The machinations of huge oil-producing states can be obscure and tedious, but the end result of a more restricted supply is likely to be increased energy prices.
Some are predicting oil to rise to $60 a barrel. To put that into context, peak oil prices were $145 per barrel, seen in July 2008. The lowest price was $27 per barrel, at the start of 2016. These rises will be seen at the pump.
Luke Bosdet, a spokesperson for the AA, says: “Car fuel efficiency drops typically by three miles per gallon in cold weather which is a three to five-litre loss per 55-litre tank (55 litres = 12 gallons = 36 miles lost. A 45 mpg car does 10 miles to the litre, a 35 mpg car does 7.7).
“Petrol averaged 114.16p a litre yesterday, which puts the potential cold weather financial loss in a range of £4 to £5.35 a tank.”
Now some analysts are expecting pump prices to reach as high as 123p a litre as a result of the Opec decision.
Mr Bosdet says: “Should an OPEC oil price cap send the average petrol price back to £1.20 a litre, last seen in December 2014, the winter fuel cost penalty would range between £4.30 and £5.65 a tank.”
Household energy prices are also likely to rise, although the relationship between the oil price and energy bills is not direct or immediate, as energy suppliers tend to build price stability functionality into their infrastructure.
An additional burden is the cold weather, with the AA’s figures showing that even with the cheap petrol the UK has been enjoying lately, consumers suffer.
However, rising oil prices will increase inflationary pressure, as companies will have to spend more to transport and package goods around the country.