How high could UK petrol and diesel prices go?

Motorists across the United Kingdom are once again bracing themselves for a significant surge in fuel costs, as the escalating geopolitical tensions in the Middle East, specifically the US-Israel war with Iran, ripple through global energy markets. The conflict, which ignited on 28 February, has plunged the production and transportation of energy across the Middle East into uncertainty, with reports of missile strikes and drone attacks disrupting crucial supply lines and heightening fears of broader regional instability. This volatility has directly led to a sharp increase in wholesale oil and gas prices, a phenomenon that traditionally manifests first and most acutely at the nation’s fuel pumps, subsequently threatening to inflate the cost of other essential goods and services.

The intricate relationship between crude oil prices and the cost of petrol and diesel at the forecourt means that any significant movement in global oil markets inevitably impacts UK motorists. Crude oil is the fundamental ingredient in both petrol and diesel, making higher wholesale costs a direct precursor to more expensive fill-ups. Since the conflict’s onset, the price of a barrel of Brent crude – the internationally recognised benchmark for oil prices – has climbed dramatically, rising from approximately $73 to $91 as of Wednesday, 11 March. This upward trajectory underscores the market’s anxiety regarding supply disruptions. Energy analysts widely estimate that every $10 increase in the price of a barrel of oil typically translates to an approximate 7p rise per litre at the pump. This calculation highlights the sensitivity of retail fuel prices to even moderate shifts in the global commodity market.

Recent data from the motoring organisation the RAC confirms this trend, showing that average petrol prices have increased by 6.81p since the war began, reaching 139.64p a litre. Diesel, often more susceptible to supply shocks due to its industrial demand, has seen an even steeper climb, rising by 14.81p to 157.19p a litre. These figures, while substantial, are considered by experts to be just the initial wave of price adjustments. There is an inherent time lag in the fuel supply chain, typically around a fortnight, for movements in wholesale oil markets to fully permeate and reflect in retail pump prices. This delay means that the full impact of the recent oil price hikes is still yet to be felt by consumers. Simon Williams, head of policy at the RAC, warned that "Unleaded is almost certainly going to reach an average of 140p in the next week or so," adding that "While diesel looks highly likely to climb to at least 160p a litre." Should oil prices stabilise around the $100 mark, the RAC forecasts that petrol could realistically approach 150p a litre, with diesel potentially soaring to almost 180p. To put this into historical context, the highest recorded average price for petrol in the UK was 191.53p in July 2022, following Russia’s full-scale invasion of Ukraine, demonstrating the potential for further significant increases if geopolitical tensions persist. The components of a litre of fuel typically include the wholesale cost of the refined product, fuel duty (a fixed tax per litre), Value Added Tax (VAT) applied to the total price including duty, and finally, the retailer’s margin and distribution costs. The wholesale cost of crude oil and its refining accounts for the largest and most volatile portion.

The UK’s energy landscape makes it particularly vulnerable to such global price shocks. Despite its historical role as an oil and gas producer from the North Sea, the UK is now heavily reliant on imports to meet its energy demands. The lion’s share of these crucial imports originates from stable partners like the United States and Norway. While the UK does extract oil from the North Sea, much of this crude is exported for refining elsewhere due to the specific types of crude produced and the capabilities of domestic refineries. Consequently, the price paid by the UK for its imported energy is inextricably linked to the fluctuating global market price of oil and gas. Any disruption, even in regions not directly supplying the UK, creates ripple effects across the interconnected global energy grid, pushing up prices for all buyers.

Beyond the immediate hit at the pump, persistently higher oil prices pose a significant threat to the broader economy, particularly impacting food prices. The mechanism is multi-faceted. Firstly, increased petrol and diesel costs directly escalate the transport expenses for businesses responsible for moving products, including foodstuffs, across the country. These elevated operational costs are often inevitably passed on to consumers by shops and supermarkets, leading to higher retail prices for groceries. Secondly, and perhaps less immediately obvious, some elements derived from crude oil are critical components in the production of fertilisers. Benjamin Godwin, a partner at investment advisory firm PRISM Strategic Intelligence, explained that "there could be a cost implication in terms of food prices" due to this linkage. A rise in fertiliser costs directly increases agricultural production expenses, which farmers then pass on in the price of their produce. This could exacerbate existing pressures on the food supply chain. However, Godwin also noted that if the current conflict proves to be short-lived and contained, its impact on food prices might not be immediate or sustained. A prolonged period of elevated energy prices, conversely, would almost certainly lead to a more pronounced and lasting increase in food costs.

The impact of rising wholesale energy costs on domestic energy bills for millions of UK householders is, in the short term, somewhat mitigated by existing regulatory frameworks. Households whose gas and electricity bills are governed by the energy price cap, set by the regulator Ofgem, have a degree of protection. The unit prices for the three months from April have already been determined and publicly announced, meaning these consumers are shielded from the immediate surge in wholesale costs. However, this protection is not indefinite. The price cap is reviewed quarterly, and depending on the duration and intensity of the current conflict and its effect on wholesale prices, there could be a significant upward adjustment when the next cap is set for the three months commencing in July. For those who opted for fixed-term energy tariffs, their prices are immune to current wholesale market fluctuations. Yet, energy suppliers, anticipating future volatility, have already begun to reconsider their offerings, pulling cheaper fixed deals off the market. This leaves fewer attractive options for consumers whose current fixed terms are expiring or those looking to switch, potentially locking them into higher prices further down the line. Separately, households in Northern Ireland and many rural areas across the UK, who rely on heating oil, face a more direct and immediate impact. Heating oil prices fluctuate much more responsively to changes in global crude oil prices, meaning the current global uncertainty has already pushed up costs for those needing to refill their tanks.

The broader macroeconomic implications of sustained high energy prices are significant, particularly concerning UK inflation and interest rates. Inflation, which measures the rate at which prices for goods and services are rising, had shown signs of easing recently, falling from its post-Ukraine invasion peaks and was widely expected to continue its downward trend this year. The Bank of England, which uses interest rates as its primary tool to keep inflation close to its 2% target, was consequently anticipated to begin a steady series of rate cuts this year. However, if higher energy costs lead to a broader increase in prices – a phenomenon known as ‘second-round effects’ – inflation may stagnate or even reverse its downward trajectory. This scenario casts serious doubt on the prospect of imminent interest rate cuts, at least for the foreseeable future. Mortgage lenders, whose rates are heavily influenced by their expectations of the Bank of England’s monetary policy decisions and the cost of borrowing on financial markets, have already begun to react. Many have started to increase their own lending rates in anticipation of prolonged higher interest rates. This means that anyone looking to remortgage or secure a new mortgage is likely to face slightly higher costs than they would have prior to the recent escalation of events. Much hinges on how long crude prices remain elevated and whether this leads to a widespread "cascade" of price increases across various sectors, including food, agriculture, and other manufactured goods, according to Subitha Subramaniam, chief economist and head of investment strategy at Sarasin & Partners. While the immediate influence on prices might not be fully evident before the Bank of England’s next rate-setting committee meeting, the prevailing sentiment among economists, including Subramaniam, is that "the prudent course for the Bank of England would be to remain on hold," exercising caution in the face of heightened uncertainty.

The path ahead for UK petrol and diesel prices, and indeed for the broader economy, remains inextricably linked to the unpredictable nature of geopolitical events. While immediate protections exist for some, the underlying vulnerability to global energy shocks persists, leaving consumers and policymakers alike to navigate a period of significant economic uncertainty.