How high could UK petrol and diesel prices go?

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Faarea MasudBusiness reporter

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Motorists in the UK are facing higher fuel costs as the US-Israel war with Iran continues.

Wholesale oil and gas prices have surged since the conflict began on 28 February, with the production and transportation of energy across the Middle East slowing or stopping entirely due to missile strikes and drone attacks.

Higher energy prices may lead to a rise in the cost of other goods, but it often shows up first at the fuel pump.

How are wholesale oil prices affecting petrol and diesel?

Crude oil is a key ingredient in petrol and diesel, meaning higher wholesale costs make filling up a car more expensive.

Since the war began, the price of a barrel of Brent crude, the global benchmark for oil prices, has jumped from $73 (£55) to over $115a barrel.

Analysts say every $10 increase in the oil price pushes up pump prices by roughly 7p a litre.

The most recent data from motoring organisation the RAC shows that since the war began, average petrol prices have risen by 19p to 152p a litre.

Diesel has increased by 40p to 181p a litre, and these prices are likely to go higher.

There is normally a time lag, with movements in oil markets taking about a fortnight to impact fuel prices.

Some fuel retailers have been accused of price gouging, but they have denied this. The official markets regulator is investigating the issue.

Where does the UK get its oil and gas from?

The UK is heavily reliant on oil and gas imports, with the lion’s share of those imports coming from the US and Norway.

The price of oil on the global market determines how much the UK pays for it.

Though the UK does get oil from the North Sea, most of that is exported for refining elsewhere.

Could there be an oil shortage in the UK?

The boss of oil giant Shell has said that there could be a fuel shortage in Europe within weeks due to blockages in the Strait of Hormuz.

The comments come after the International Energy Agency (IEA) suggested a list of measures to reduce energy and fuel use in response to the conflict, including working from home and carpooling.

However, the UK government and the Fuels Industry UK has described Britain’s fuel supplies as “resilient”. Fuels Industry UK said Britons can continue to buy fuels as normal.

Oil makes up 35% of the UK’s total energy supply, according to the Department for Energy Security and Net Zero. As a member of the IEA, it must hold 90 days’ worth of net oil imports, but it currently holds more than this.

Some have said that restrictions on new drilling licences in the North Sea should be eased to limit price rises for households, but others have said this is unlikely to significantly reduce energy prices for the public.

What impact could oil prices have on food prices?

More expensive petrol and diesel increases the transport costs for businesses moving products around the country, which can get passed on by shops and supermarkets to the consumer.

In addition, some elements of crude oil are used in fertiliser, meaning there could be a cost implication in terms of food prices," Benjamin Godwin, partner at investment advisory firm PRISM Strategic Intelligence, told the BBC.

However, if the conflict is short-lived then it is unlikely to result in an immediate increase in food prices, he said.

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Will my energy bills rise?

In the short term, millions of UK householders’ domestic gas and electricity bills are shielded from any impact on wholesale costs paid by suppliers.

People whose energy bills are governed by the price cap already know what their unit prices are now, and will be for the three months from April. That price has already been set.

However, depending on how long the conflict lasts, there could be an impact on prices when the next price cap is set, for the three months from July.

Anyone who has fixed their energy tariff already will not see a price rise, but suppliers have started reconsidering what they are willing to offer for those fixed-price deals, and have been pulling cheaper deals off the market.

Heating oil is used by many households in Northern Ireland, and in some rural areas. The prices do fluctuate more directly in response to the oil price, so the latest global uncertainty has pushed up costs for those households refilling their tanks.

The prime minister has announced a £53m support package to help those hit by the sharp increase in heating oil.

Will this affect UK inflation and interest rates?

UK inflation, which measures the pace of price rises, has eased relative to the heights reached immediately after Russia launched its full-scale invasion of Ukraine four years ago, and was expected to keep falling this year.

Interest rates, which are used by the Bank of England to keep inflation close to its 2% target, were expected to continue on a steady downward trend this year as a result.

But if higher energy costs push up prices more broadly, inflation will not fall, or not as fast as was hoped. That throws any interest rate cuts into question, at least for the time being.

As a result mortgage lenders, who base the rates they offer on what they expect the Bank of England to do with interest rates, have started to increase their own lending rates. Anyone remortgaging or taking out their first mortgage is likely to face slightly higher rates than they would have before this week’s events.

Additional reporting by Emer Moreau, Kevin Peachey, and Dearbail Jordan

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