Petrol prices are very much the talking point as we speak but what is behind it? Talk of 120p per litre was quickly extinguished as fuel is already selling on some forecourts at that price.
Prepare for it but if the logic we are being given to support 120p is true, 150p is just a few months away. Do I believe that will happen? Very probably unless all the relevant authorities take the correct and responsible action.
You'll remember that fuel prices were attributed in 2008 to the soaring oil price which we correctly attributed to speculative traders. In the five years from 2003 to 2008, these traders had purchased more than twenty times the amount of capital invested in index traded strategies in commodities than in the total invested in history to that point.
The result – oil was driven through the roof to $147.
The excuse at the time was soaring demand from the world including China etc. Obviously that was exposed here as nonsense and that can be borne out by fuel at near 120p today with oil poised at $80, and guess what, we are only just coming out of a recession.
Oil was 83% more expensive when fuel was last at this price. What a discrepancy that is.
When you are next stood at the pump filling up, consider that two thirds of the time you are stood there you are assisting the taxman as tax today accounts for 67% of fuel prices. When the conservatives where last in power the tax was 76.9%.
However the collect today is actually 77p per litre as opposed to 39.4 back in 1996. (1)
It's worth noting that fuel tax is applied on petrol then Vat is added to that, so we pay tax on our tax. Easy money.
One of the biggest issues for us is a weak sterling. As oil (even UK oil) is denominated in dollars, any weakness in sterling will reflect in fuel prices. Oil is also seen as a hedge for the dollar. If investors are worried about the dollar they buy oil to protect their investments.
And so the strength of the dollar and sterling are key. A stronger US economy will mean investors become net sellers of crude oil and move toward the dollar, thereby driving oil southwards. If the UK economy is strengthening at the same time the impact of the rising dollar on oil is alleviated. The only flip side to that is the potential for greater usage of oil in the recovery process which of course will create a true supply and demand price rise.
If Obama gets his way with the proprietary traders and blocks the loopholes the CFTC (commodities futures trading commission) opened, the price of oil will relate to demand again. Remember between 2003 and 2008 oil jumped from its average price of $32 to $147 as the capital above was invested into commodities.
The government could assist with this by heavily taxing all gains from proprietary trading. It's not complicated for them to consider that but I suppose it depends on who has a hold of who.
Providing further respite (and more cynicism for me) is that according to the energy department, US stockpiles of crude oil have increased for a seventh week to 344 million barrels. This is 5% above the five year average which shows demand for oil is low. Demand declined 4.2% to 18.8m barrels a day which is the biggest weekly drop since November. (2)
It is no surprise that Oil futures dropped 2.1% on Friday the 20th March thereby showing the expected downward pressure on oil. (3)
So in summary, all the logic given re supporting petrol prices does not make sense. If the government want to deal with it they can complete the simple action points I have shown above and we can go back to Â£10 of fuel at least getting rid of the red light on the dash.
(1) Energy dept (taipanpublishinggroup.com/news-0319101.html)
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'