Why is the petrol price falling, and will it rise again?

Petrol prices are easing, but it’s not all good news, and it might not last, says Saloni Sardana. Here's why.

Petrol prices are easing, but it’s not all good news, and it might not last. Prices at forecourts are currently at around 172p per litre, and even 160p per litre in some outlets, while the cost of filling an average family car with petrol is now around £95, down from £105 in July.  

But the reason for the fall is a double-edged sword – fears of a recession are driving down demand for oil. 

The UK recorded double digit inflation in July and The Bank of England warned earlier this month that inflation will peak at 13% in the UK and the country will fall into recession.  

This came after the US recorded two consecutive quarters of negative growth. 

Why petrol prices are falling now  

Petrol prices are closely related to the wholesale cost of oil. Typically, every $2 increase in the oil price results in a 1p rise in petrol prices.  

The oil price has been falling because of a bleak outlook for the global economy.  

“Part of the reason we are seeing petrol prices ease is because speculators are exiting the market,” Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, tells MoneyWeek. “They are selling off holdings with the expectation that crude oil will fall.” 

The Federal Reserve, America’s central bank, is aggressively raising interest rates to curb inflation, driving fears of a recession and lowering the demand for oil.  

Increasing inventories In the US and pledges from Opec leaders to raise output if the world is short of oil in winter have also kept oil prices low.  

How Iran and Russia could drive prices higher again  

But, while consumers may be rejoicing about lower prices, they shouldn’t get too excited. Prices are likely to fall less than they historically do during recessions, says Streeter, because of Russia’s war with Ukraine.  

Russia is a major player in world energy markets. It used to provide more than 40% of Europe’s gas and the EU used to import 29% of its oil from Russia. Now, sanctions against Russia have driven energy prices up.  

Another worry is Iran. Encouraging signs that Iran was closer to sealing an updated 2015 nuclear deal with the US helped drive the oil price lower in recent days.  

But a deal is not expected for some time yet, according to Goldman Sachs, which expects Russia to be an obstacle. It has an “interest in high commodity prices” which “makes [its] obstruction of a deal more likely” Goldman said.  

But even if a fresh nuclear deal did materialise, it would still take at least 12 months for Iran to boost its oil production from 2.7 million to 3.7 million barrels a day, says Goldman.  

A strong dollar and a weak pound is another factor propelling petrol prices to record highs. 

But lower prices may be short-lived or may not fall too much more even if we do enter a recession because the war in Ukraine is still casting a cloud of uncertainty on energy markets and because in reality Iran still needs time to ramp up its production.  

So if petrol prices rise again, what can you do about it? 

Tips to keep your petrol costs down  

There are a number of simple things you can do to keep your petrol costs down.  

Improve your research. It may seem obvious, but even taking more time to research which areas offer the cheapest fuel can stave money off your fuel bill. Most people tend to flock to the closest petrol stations, or simply the ones they know of, but doing a bit more research can be a fruitful exercise. You can use our sister website GoCompare to check the best prices.  

Slow down. Sticking to – or below – the speed limit isn’t just useful in avoiding fines, it can also lower your fuel consumption

Service your car regularly. Regularly servicing your car reduces the chances of receiving surprise or shock bills in the future. Cars that have been recently serviced usually use less fuel than cars that have not been serviced for longer periods of time.  

Check your tyre pressure. Tyre pressure plays an important role in your fuel consumption too. Both over-inflated and under-inflated tyres are bad for your fuel consumption, so it is important for you to check your tyre pressure.  

You can read more about how to save money on your fuel bill here.

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