Thursday, 24 February 2011

New all-time high oil price in £/barrel - what it means for the UK

Back in early July 2008, oil prices were at $145/barrel, and with the sterling/dollar exchange rate at the time, this was equivalent to £73/barrel.

This morning, the price of Brent crude oil approached $120/barrel, while the West Texas Intermediate price (a US-focused price) was in the $100-105 range. There's lots of reasons for the difference between the price benchmarks, but the important thing is that WTI is only available in the USA, while Brent is named after production from the North Sea.

Add in the fact that the exchange rate is now $1.62 to the pound, while it was almost $2 to the pound in July 2008, and you now have an oil price this morning of about £74/barrel.

So, in the UK we're now at another all-time high oil price, so expect to see the price of petrol and diesel climbing over the coming days and weeks. Also, consider that the last price spike came at a time of affluence, and helped trigger the biggest recession in decades, while this spike comes while we're still barely out of that recession, and are about to face significant cuts in government spending.

Finally, the persistently high and climbing oil price makes nonsense of the Bank of England's view that the inflation pressure from oil is transient. Expect higher inflation, and interest rate rises to follow. Ultimately, the price of oil will only fall back when enough people decide they are too broke to buy it any more - and that's where we're headed anyway...

At least it's a sunny day.


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