The price of oil has fallen to a fresh low, with a glut of production coming not just from US frackers but also from Iran as sanctions are lifted.
Supermarkets are fighting each other to offer unleaded petrol at below £1 a litre, and economists are pencilling in higher growth as consumers feel the benefit. On Monday morning the price of Brent crude fell another 1.6% to hit just $36.30. So what does this mean for motorists and everyone else?
1. Crude oil is back to 2004 levels, but petrol is not
When Brent crude oil was last at $36 in summer 2004, motorists were paying 79p a litre for petrol and 80p for diesel. Today, the average is 102p for petrol and 106p for diesel, although both can be found at 99p a litre in some supermarket forecourts.
2. Motorists are generally not being ripped off by garages
There is a floor on how far the price of petrol can fall. The government takes 57.95p in fuel duty for every litre sold, plus charges another 20% in VAT, so even if the cost of oil was zero, petrol prices would still be around 70p a litre.
3. Diesel drivers probably are being ripped off
The wholesale price for diesel is around 3p per litre below that of unleaded petrol, but the average forecourt price is 4p more. The RAC reckons some retailers are using price falls to increase margins on diesel.
4. It’s good for the economy and borrowers
Inflation, currently just 0.1%, is being held in check by falling oil prices. This takes pressure off the Bank of England to increase the base rate, which is unlikely to start rising until next summer at the earliest.
If oil stays at or below $50 a barrel, then it adds 1% year to the size of the economy, according to consultant PwC. It reckons it adds 90,000 to 120,000 jobs, and increases consumer spending. The government makes more from taxing the additional income than what it loses from tax on North Sea oil producers. And as the North Sea fields run dry and Britain imports more, the falling oil price cuts our yawning trade gap.
5. Not everyone drives or spends that much on petrol
It’s good financially for two-car households where both have long commutes, with the AA estimating that the price of filling up the average tank is down £9.60 this year. But the average spend on petrol was just £23 a week in 2014, according to the latest official Family Spending survey, down 50p a week from a year earlier. That compares with a total weekly spend of £531, so while price falls are good, it’s not going to have an incredible impact on household budgets. Motorists doing the typical 7,500 miles a year will save around £150 in 2015 compared with 2014.
6. It’s bad news for the environment
Ford’s Lincoln Navigator is a “full-size luxury SUV” and manages just 15 miles per gallon in town, yet sales were up 88% in November, as drivers cast off worries about gas prices. In the UK, consumers are dumping estate cars for smaller “crossove” SUVs, with the Vauxhall Mokka and Nissan Qashqai among the top 10 sellers in the market, although the “super-mini” sector has shown the fastest growth. In Australia, the Nissan X Trail is leading a big increase in SUV sales, up 16% over the year.
But while petrol consumption has risen in the US – by around 500m barrels a day compared with last year – and is up sharply in India, the experts are puzzling over what’s happening in the UK. From January to November 2014, UK vehicle oil consumption ran at around 1.47bn litres per month, but over the same period this year it has fallen to around 1.44bn litres per month, despite the drop in petrol prices. At the AA, economists wonder if this is because of other pressures on household budgets, such as rising rents.
7. Airlines are loving this, and so are frequent flyers
Aviation fuel makes up around 46% of Ryanair’s operating costs, and 33% of costs at British Airways. Many airlines have been locked into pricey contracts, but with jet fuel prices down by 35% over the past year, and the hedged positions unwinding, their costs are falling dramatically. Already in 2015, airlines have saved nearly $90bn on fuel. Look for signs of an airline price war in early 2016, with Ryanair already predicting price cuts.
8. Your pension manager is worried
Shell and BP are the second and fourth biggest payers of dividends on the UK stock market respectively, and are traditionally the major holdings in any income fund. Sustaining dividends with oil at $36 is going to be a near impossible task. BP’s share price is down from 484p to 344p since May, while Royal Dutch Shell is down from 2,100p to 1,475p. It partly explains why the FTSE 100 has performed so abysmally in recent months – it is peculiarly vulnerable to commodity price falls, with so many of the giant oil and mining stocks listed in London.
9. India, China and Japan gain; the middle east, Russia and Venezuela lose
India imports around 75% of its oil, so price falls are beneficial to its economy. China is also a net importer. The Russian government loses around $2bn for every $1 fall in oil prices, but for crisis-hit Venezula, it’s catastrophic, with 90% of the country’s exports being oil.
It is estimated that Iran needs an oil price of around $134 to balance its national budget, and even super-rich Qatar needs $77. The conventional wisdom is that Saudi Arabia is keeping the pumps flowing to destroy the US fracking industry. But it doesn’t seem to be working; US fracking production peaked in April at around 9.6m barrels per day, but has fallen only slightly since, with new technology enabling many fields to make money even with lower oil prices.
10. Your insurance company will swipe some of the gains
Drivers pocketing savings at the petrol pumps will be passing some of that cash over to their insurers. After several years of declining premiums, the industry is aiming to push through rate increases of around 8% in 2016, according to consultant Ernst & Young.
