The RAC has reported today that the cost of filling a 55-litre tank of petrol, about the size of the tank of an average family car has risen to £100.27. The cost of diesel makes the equivalent figure £103.43.
The immediate cause of these fuel price spikes is the war in Ukraine which has led NATO and NATO-aligned countries to embargo the Russian economy, including recent EU sanctions drastically scaling down the importing of oil from Russia.
Inflation
The cost of fuel, lockdowns in China and economic are all pushing inflation higher. Inflation is a measurement of price rises. Prices rise when people are willing to pay higher prices but suppliers are unwilling to cut prices to gain market share.
At the moment, lockdowns in China are reducing the number of manufactured goods coming to market, which means that retailers can increase the price of the remaining goods without fear of being undercut. As the economies in the West begin to recover from Covid, labour markets are tightening leading to higher wages; further increasing the prices people are willing to pay.
Most dangerous of all perhaps are fuel price rises. These are most easily seen at the petrol pump but fossil fuels are intertwined with almost every activity in the economy. Shipping and transport are still overwhelmingly powered by fossil fuels, plastics are made from hydrocarbons, both heating and air conditioners are either directly powered by the combustion of fuel or indirectly to create electricity and even food production is heavily dependent on fertilisers synthesised from hydrocarbons. Although the EU is still buying natural gas from Russia the costs of different fossil fuels often change in tandem so that an oil price spike leads to a spike in the cost of natural gas.
Biden to the rescue?
Despite the price rises the world has no shortage of fuel. US President Biden has shown a willingness to work with fuel producing powers, even those with ongoing diplomatic tensions with the US, such as Venezuela and Saudi Arabia to increase supplies and therefore lower the price of these energy sources. He has also tapped the US Strategic Oil Reserve to try to damp down prices.
In an upcoming visit to Saudi Arabia it is likely that the President will try to put pressure on the Organisation of Petroleum Exporting Countries (OPEC) to release more oil onto the open market. It is unclear however, whether they can meet current demand without an end to sanctions on Russia and it’s also open to debate whether it would be in their interests to do so.
Unsurprisingly, oil price rises are good for oil producers leading to a higher profit margin per barrel. Western politicians in particular are stuck between policies designed to fight climate change that will reduce the use of fossil fuels and the need to keep fuel prices low until those technologies mature. Meanwhile oil producing countries will lose out from a switch away from fossil fuels and may be angling to sell their oil at a high price before their reserves become stranded assets.
Final thought
Some inflation is good for an economy, it gives prices the flexibility to change and encourages investment of spare cash. High inflation or inflationary spirals however, can be catastrophic. Although wages will eventually rise to meet inflation in the short term, millions will be left out of pocket as prices rise faster than wage increases come. As wages rise, the value of savings will be eroded wiping out years of effort spent to build them up.
Given these effects it should come as little surprise that inflation is one of the most difficult problems a Government can face. Solutions range from raising interest rates (in Britain the Government actually has little control over this, as they are independently set by the Bank of England) which can tip an economy into recession, to raising wages and increasing benefits, which, while helping those hit by inflation, can risk increasing the inflation itself.
The only good news is that as wages rise with inflation, more people are pushed into higher tax bands netting revenue for the exchequer. As the value of money decreases, so too does the size of Government debt relative to GDP. Persistently high fuel prices, though economically painful and potentially disastrous for the very poor, will give extra impetus to reduce the world’s dependence on fossil fuel which is obviously required to prevent catastrophic global warming.
If prices keep rising, expect to see political turmoil not just in the UK but across the world as citizen anger increases and politicians struggle with forces beyond their control.
Photo Credit: Geopolitical Intelligence Services