British consumers found themselves in a perfect storm when it came to oil prices in the month of October. First there was the news that OPEC were going to cut oil production and this caused markets to swerve strongly upwards. At the beginning of September, the price of oil was $45. By the end of that month, it had risen to $49 and by the middle of October, prices had hit the $52 mark. On its own, that would have been enough to push fuel prices up by about 3 pence per litre (ppl), but the concurrent haemorrhaging in the value of the £ GDP meant that this was only half the story.
As this report has pointed out so many times in the past, the consumer fuel price is only partly affected by the price in $ per barrel. Yes oil prices have moved up since the summer, but they have only gone up by 15%, whereas the £ / $ exchange rate has moved by circa 25% over the same period. And because this currency shift has been at the expense of the £ GBP, this has pushed UK fuel prices up by a much greater factor than would ordinarily result from $ oil price movements alone. If we consider the $ price of diesel at the mid-point of October, we can see it was trading at circa $480 / tonne (the oil markets are never straight-forward of-course, with crude being traded in barrels and refined products being traded in tonnes!). At a pre-Brexit exchange rate of 1.50, this would have given a price of 102ppl (including duty and VAT). But use the actual 1.21 exchange rate that we are now experiencing post-Brexit, and we have a price of 110pp1. That’s an incredible 8ppl uplift on the price of diesel due to the exchange rate, which when added to the 3ppl oil price movement, gives a total increase to the consumer of llppl.
Britain of course is not the only country to experience the pain of a rapidly falling exchange rate. Take a look at Canada and see how the “Loonie” (gotta love the official / unofficial name for the Canadian Dollar) tanked against the US Dollar in the aftermath of the oil price crash of 2014. As a commodity economy Canada has always been exposed to falling oil prices, and between 2014 and 2015, the Loonie went from being worth 94% of the $ US (almost parity) to 68% (nothing like parity). The effect on Canadian fuel costs should have been seismic, with prices being inflated by more than 20 cents per litre (-12ppl) as a result of the weakness in the Canadian currency.
But – and this is the key point – this large upward adjustment in Canadian fuel prices was completely lost in the massive drop in the underlying oil price that was experienced at the same time. So in the second half of 2014, oil prices (in $ US) tumbled by a massive 70% and this should have reduced Canadian fuel prices by circa 50 cents per litre (cpl). In fact fuel prices only fell by 30cp1 – due to the adverse currency movements against the Canadian $ – but who really cared about that, when consumers were paying so much less for their fuel in 2015 versus 2014? An extra 20 cents per litre off the price of fuel might even seem greedy (!) and as everyone still had more money in their pockets, the so-called price “rise” felt like nothing of the sort…
Cross back over the North Atlantic and fast forward to October 2016 and we have a Britain that is definitely not in this position. The 2014 fall in oil price has been experienced and enjoyed thank you very much, but now the underlying oil price is creeping back up and worse, the £ GBP is slamming down. Which means the “artificial” price uplift that was experienced in Canada is not artificial at all in the UK and is in in fact, a very real price increase. Couple that with the fact that Britain imports the majority of its food…and white goods…and building materials…and clothes…and vehicles (etc, etc) and you have the perfect ingredients for the 2017 inflationary spike that is now so worrying the Bank of England.
Looking at the situation in the short-term, it is very difficult to see how the current trends will reverse. Until Article 50 is triggered by the Government and formal negotiations begin for the UK to leave the European Union, there seems no obvious circumstances where the £ GBP will recover its lost value. As we know, the date for Article 50 has been notionally set for the end of March 2017, but with UK politicians grappling with the magnitude of Brexit, who would confidently bet against that date slipping back? And as long as we have inaction, the £ GBP will stay weak and with it, the related pence per litre price of fuel will remain disproportionately high. And all of this, before we even take into account what our OPEC friends do, or do not decide at their forthcoming November meeting.