Oil speculators threaten British recovery, AA's experts warn

Petrol moves towards £1 a litre as investors pile into oil
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The Independent Online

The cost of petrol is threatening to pass the psychologically important £1-per-litre mark, with motoring groups warning that speculators pushing up oil prices are endangering Britain's economic recovery.

Prices at the pumps have risen consistently since January to reach 99.99p per litre for petrol and 103.74p per llitre for diesel yesterday, mirroring a steadily increasing oil price. London Brent crude for July delivery topped $67 per barrel yesterday, having breached $66 on Friday for the first time since October.

The fear is that cash-strapped drivers will stop spending their money on other items, which could slow recovery or push the country even deeper into recession, according to the Automobile Association. In a survey of 15,000 motorists, published today, 55 per cent told the AA's researchers they were already cutting back on either fuel consumption or household spending in response to the rising petrol prices.

Luke Bosdet, a spokesman for the AA, said: "Drivers just don't understand why, when so much of the world is in recession, fuel prices are going up."

The finger of blame is pointing at investors ploughing money into commodities, particularly oil, in the hope that they avoid beleaguered equity markets and cash in on the burgeoning economic recovery. But if fuel prices are pushed too high, consumers will stop spending, drivers will stop driving and the price will crash.

Last summer's all-time high of $147 per barrel of oil was partly fuelled by speculation. But the impact on demand, particularly among US drivers, combined with the banking crisis applying the brakes to economic growth, sent oil spiralling downwards to as low as $35 in December. Fuel prices followed the same curve. Last July, petrol cost 119.7p per litre and diesel 133.25p. By January, petrol was down to 86.07p and diesel to 98.25p. "The speculators have learned nothing from last summer," Mr Bosdet added. "The markets are playing the same game but consumers do not have the same spending potential."

At least some of the rising oil price is down to fundamentals. Opec, the 12-member cartel of oil producing nations, agreed three tranches of production cuts last autumn to help prop up the collapsing price, taking an estimated 3.2 million barrels per day out of the market. But experts estimate that Opec's cuts are only responsible for taking the price back up to about $50. "Oil has now become a justifiable investment for funds looking for the maximum return," Mr Bosdet said. "The problem is that they are gambling on a recovery that may not happen for months and in the meantime are creating a mini bubble."

The Government's policy on fuel duty is not helping motorists either. Tax increases added 2p per litre from 1 April, with another 2p per litre to come at the start of September. The end of the VAT holiday in December will add another 2.5 per cent, and the re-introduction of the fuel price "escalator" will push up duty by another 1p per litre in real terms from 2010.

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