Cost of living crisis

Understanding rising fuel prices

5 min read 28 Sep 22

Share the article
linkedin-logo
twitter-logo

In this article

View all cost of living articles

Summary

You’ve probably noticed that fuel prices have increased a lot over the last few months. While they’ve always fluctuated, recently it has risen sharply reaching a record high in July.

This article takes a closer look at the causes of the price rises. But please remember that many different factors influence this. The article is just a quick look at what’s contributed to rising fuel costs, or a starting point for further reading.

What’s caused the rising prices?

It’s generally believed that the current increases in fuel prices can be attributed to three key global events:

Post pandemic demand for oil

During the worldwide lockdowns in 2020 demand for fuel fell sharply, with factories ceasing production, grounded aircrafts and a lack of travel across the globe. This lead to a fall in oil prices. However, as countries and economies opened up, demand suddenly spiked. The Organisation of the Petroleum Exporting Countries (OPEC) had limited the amounts stockpiled and this sudden increase put pressure on oil supply, causing the cost of a barrel of oil to rise.

Russia’s invasion of Ukraine

Russia is one of the top three oil producers in the world.  When Russia invaded Ukraine global sanctions were imposed which lead to supply fears and ultimately caused a further price rise to the cost of a barrel.

The US dollar exchange rate

The US is the largest producer and exporter of crude oil, meaning the pricing system is in US dollars. The value of the dollar and the exchange rate has an impact on the price of oil. If the value of the dollar weakens then the price of oil increases. On the other hand if the dollar is strong then the price of oil falls.

The combination of these factors creates an environment of constantly changing prices.

Other factors to consider

The UK Government also has an influence on fuel prices. A significant part of the price is taxes. Currently, fuel duty is 52.95p per litre for petrol and diesel, and then there is 20% of value added tax (VAT). All of this means that around half of the price we pay goes directly to the Treasury. And don’t forget, the retailer also needs to make a profit.

Are there any positives to high oil prices?

It is likely we are all feeling the pinch of rising fuel costs but are there any upsides to this trend? The higher costs of fuel is driving more sustainable behaviours. People are driving less and changing their habits to get the most value out of their fuel –for example shopping closer to home. 

People may also be more inclined to use public transport more now. And when it comes to buying a new car, people will be more motivated to look at cars that are cheaper to run and that means cars which pollute less, so this is where the hybrid car industry can benefit. Suddenly, the initial cost of an electric car seems less daunting as the benefits of cheaper running costs are much more apparent.  

This behaviour change creates a knock-on effect: as we look for sensible, viable alternatives to petrol, the industry and the demand for scientists and engineers in these fields expands. The more people we have looking for better and cleaner ways to use energy, the more likely we are to find sustainable and economically viable answers.

Struggling with rising prices?

The cost of living crisis is affecting all of us in some way, that may be fuel prices, the cost of food or our mental well-being.

If you’re in financial difficulty or struggling in other ways with the cost of living crisis, you may find it useful to visit the Citizen Advice Service. They have information on debt solutions, ways to get help, mental well-being, support available from the Government and more. You can visit their cost of living page.

Share the article
linkedin-logo
twitter-logo

Related content

View all cost of living articles

 

© Prudential 2023

"Prudential" is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company Limited. The Prudential Assurance Company Limited and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plc which is a holding company registered in England and Wales with registered number 11444019 and registered office at 10 Fenchurch Avenue, London EC3M 5AG, some of whose subsidiaries are authorised and regulated, as applicable, by the Prudential Regulation Authority and the Financial Conduct Authority. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.