Liam Halligan|The Telegraph| Oil prices are up almost a third over the last three months. It’s a hugely significant increase that could seriously aggravate the UK’s cost of living crisis. Yet this oil price surge seems to have barely been noticed by much of our political and media class.
The cost of a barrel of Brent crude hovered above $90 a barrel towards the end of last week, up from around $70 in early June – a 30pc rise. That’s why the price of petrol rocketed nearly 7p during August to an average of 152.25p per litre, according to RAC analysis, while diesel shot up 8p to 154.37p.
These are some of the sharpest monthly fuel price increases in more than 20 years. And, as the RAC says, with the oil price forecast to rise more, “there are likely to be further petrol and diesel price rises on forecourts up and down the UK in the coming weeks”.
Throughout the summer, the economic data has been weak across Europe, alongside a sharp slowdown in China – the world’s largest crude importer. As such, demand for oil should be slowing, causing prices to fall.
Yet oil prices have still surged over the last three months, despite a sluggish global economy. This is the first time Brent crude has gone above $90 this year. Its US equivalent, West Texas Intermediate, is also at a 10-month high.
Crude markets began to tighten earlier this summer after the Opec exporters’ cartel agreed to withhold oil supplies in a bid to raise prices, despite much of the world already grappling with high energy costs.
Anyone who downplays the power of Opec knows nothing about worldwide energy markets and even less about geopolitics.
The 13-nation body controls around two-fifths of global crude production but four-fifths of all known oil reserves. And over recent years, particularly since the full-on war in Ukraine erupted in February 2022, there has been deepening collaboration between Opec lynchpin Saudi Arabia and non-member Russia.
Together this Opec-plus grouping controls almost half of global production and nine-tenths of all reserves.
Opec-plus last year agreed to gradual production cuts ultimately amounting to 3.66m barrels per day, around 3.6pc of global production. Originally in place until the end of 2023, the cartel agreed in June to extend them to 2024.
Then in July, Opec cut another 1m barrels a day from global markets, in what was originally billed as a temporary measure.
Last week, having already extended this cut until the end of September, Saudi Arabia – pumping no less than 13pc of global oil output – announced the million-barrel reduction will stay in place until the end of December.
Russia – producing similar amounts as Saudi, and already pivotal to the broader Opec-plus supply restrictions – extended its cuts as well, announcing last week its daily 300,000-barrel export reduction would also stay in place until the end of the year.
This Riyadh-Moscow move is almost purpose-made to raise tensions with the White House and much of the Western world – not least those nations highly critical of Russia’s invasion of Ukraine.
As the US election approaches next November, the price of petrol and diesel will become highly politically sensitive, with high inflation and fuel costs already providing the Republicans with ammunition to attack the Biden administration.
Opec-plus is due to meet formally in November to agree its production policy for the early months of 2024. As the race for the White House hots up, the group’s decisions, and their impact on US and broader Western living standards, will become the stuff of headline mainstream news.
There is talk among oil traders that the global economy remains some 1.5m barrels a day undersupplied through September, with futures markets pointing to a further 5pc price gain by the end of this year.
If that’s the case, the market could even rally towards the highly symbolic £100-a-barrel barrier, a benchmark last reached during the aftermath of Moscow’s invasion 19 months ago, despite global growth remaining lacklustre.
Throughout early to mid-2023, the price of oil was each month much lower than the same month last year, as the market recovered from the immediate shock of war in early to mid-2022 and the imposition of Western sanctions.
These “negative base effects” were a powerful force in helping to drag down headline inflation sharply in the US, UK and elsewhere during April, May, June and July this year, with much cheaper energy accounting for a large share of each month’s inflation reduction.
And that, in turn, has allowed central banks to suggest that this pulverising run of rate rises – the UK has endured 14 in a row – could soon come to an end, as inflation moves back down.
This latest resurgence of energy prices, though, means that these benign inflation-reducing base effects are diminishing and could even soon be reversed, with the price of crude now jacking inflation back up.
The reassurances of central bankers that peak interest rates are now in sight could soon start sounding hollow.
Despite the focus of public discourse on renewables and the broader green agenda, fossil fuels remain vital to our economic and political life. The UK currently relies on oil and gas for no less than 70pc of our energy needs.
And even on the most upbeat estimates of the efficiency of renewables and the roll-out of solar and wind turbines, as well as new nuclear, that UK fossil fuel energy share will remain up at 50pc by 2030 and 25pc by 2050 – with similar numbers across many Western nations.
In that context, crude oil in particular remains a powerful political lever as the world’s rising giants square up to the G7-led Western world, building the expanded Brics-plus grouping – with Brazil, Russia, India, China and South Africa at its heart.
That bloc expanded last month to admit Saudi Arabia, Iran, Ethiopia, Egypt, Argentina and the United Arab Emirates, as non-Western nations look to accelerate the upending of a world order they view as increasingly outdated.
The reality is that this new Brics-plus group now contains six countries producing around the same amount of crude as the rest of the world’s 20 top oil producers put together.