£1 a litre - how much of that is political?
- 24 Apr 06, 01:08 PM
Petrol is already £1 a litre on some British forecourts and the average price could soon (today?) pass £1. Coming out of OPEC right now are various statements from oil ministers that they are not going to raise the 28 million barrels per day ceiling on production. They argue that it is not short supply but demand driven by political instability - notably America's refusal to take off the table the possibility of nuking Iran, Condoleeza Rice's statement that "self defence does not require a UN resolution" in this regard, and Iran's veiled warning that it will take the price a lot higher if sanctions are imposed...
So how much of that £1 is a political premium that we are paying for the Persian Gulf instability? The first thing to remember is that, in the UK, only 30p of the price is not tax.
If you look at the recent movement in crude oil prices you will see a jump on 29 March and a relentless upward surge ever since. Over the past year the price of Nymext light crude has peaked twice, at about 70 and 68 respectively: first in August and then in January 06.
Clearly the January 06 peak had a geopolitical element. There were fears then about both Iran and Nigeria. So if you say the price then was 68 and it is now 75 that gives you a starting point of 10% that is almost all down to the standoff with Iran. This itself has three components: the IAEA investigation into the Iran nuclear programme; the baseline position of the White House on military action; and Seymour Hersh's revelation that military action could include tactical nuclear warfare.
Last week President Ahmadinejad said oil prices had not yet reached their true value: when he said that the price was 71, now it is 75. Venezuela's president Hugo Chavez warned that the oil price would "rocket" if the USA attacks Iran.
If we translate these percentages into pennies: about 3p of that pound it cost you to put a litre of petrol in your car has been added because of the heightened threat of military action with Iran, and Iran and Venezula both making statements designed to drive the price up.
However the OPEC target price is still in theory $30. Even once you have stopped laughing at that, there must still be a fundamental rather than a political explanation for the bulk of the difference between $30 and $75.
The Centre for Global Enegy Studies confirms this in its monthly survey out today:
- refinery capacity is very limited - not just because of Katrina's aftermath but current refits in teh refinery sector in the US, which is switching over to lower-sulphur gasoline.
- the move to lower sulphur is hiking the demand for "sweeter" oil
- a lot of this stuff comes from the Niger Delta, which is still seething so much that even the few journalists willing to go there find it hard to get permission to do so independently from the government
- the OECD countries are holding 4bn barrels of oil as stock - about half of that is held by governments. That could replace 18 months worth of Iranian oil in the market.
- Iraq, of course, is producing at much less than its OPEC quota, as its infrastructure has still not recovered from the war
Basically, when oil was 62 dollars a barrel, a couple of months ago, petrol in the UK was 90p a litre or less. It is hard to be scientific about the relationship of crude prices to petrol prices. But one exists - and I reckon about 3p of that 10p rise is down to Iran vs USA war of words; maybe 1p down to Nigeria; maybe throw in another 1p for good measure; the rest - at least half - is probably down to specualtion by hedge funds and supply problems in the refinery system. As to profiteering by the oil companies, it is as always hotly refuted and denied.
My question to you is this: how mad are you getting about £1 a litre and is it affecting your spending habits - or are the economists right and it really will only matter in the long term, when as Keynes said, we are all dead (hopefully of natural causes)?