Oil prices and why the price at the pumps is not falling

The price of oil has fallen to where it was in March of this year, although you would not notice it by reading the price of petrol and diesel at the pumps or by your heating oil fuel bill. Some analysts are puzzled, other say that oil speculation has stopped and others say that the twitchy casino punters that form an integral part of our energy markets have been assured by OPEC deciding not to cut back production and the failure of the recent Gulf of Mexico hurricanes to wipe out oil rigs and refineries. Although these factors may have a small part to play in the oil markets, I think (for what it is worth) that the price of oil, gas and coal, our fundamental fossil fuels, is most affected by the operation of the law of supply and demand.

Since oil prices translating into high petrol and diesel prices at the pumps several things have reduced demand. People are driving less than they did when prices were lower; some think that there are about 12% fewer car journeys. In addition the infamous credit crunch and the corresponding fall in economic prosperity affecting people who have lower wages in real terms – in terms of the pound in their pockets, have meant that people are trying to cut back on everything that they can. This is exacerbated by higher food prices.

Lower prosperity in the West also means that the factories in the East are churning our fewer consumer goods and therefore are using less energy, creating another reason for a drop in demand.

There is for people in the United Kingdom a considerable fly in the ointment of lower oil prices. When oil reached $147 a barrel in June the pound sterling could buy $2. A barrel cost £78.50. Today at $1.75 the barrel costs £57.15, still a considerable reduction but that is in the raw material price. Remember that the processing distribution and profit costs as well as the considerable tax charge are all levied in pounds, not in dollars, so even with a fall in prices with a weakening pound and the desire of the oil companies to make as much from their finite resources as they can, we are unlikely to see much of a reduction in price at the pump.

Further, as soon as economic prosperity returns so will demand and high prices. Mr Brown has not abloished the boom bust economic cycle and just as things may be hard now better times will return. With them will come higher energy prices and more carbon emissions. 

A high oil price has focused minds in Government on the need for energy security and on the advantages of renewable. Unfortunately their minds did not focus on those things for long. They reacted by abandoning all pretence at environmental concern by calling for more oil production.

Very high domestic fuel increases have also started to create hardship amongst the poorer people and the Government has sought to react to this, out of political necessity. Some ran the flag of a windfall tax up the flag pole, but no one in Government saluted it. The big idea is now to insulate all our homes, or at least all of them built since the First World War with cavity walls.

I know insulation is important but the Government over state the energy savings by insulation and fail to take into account the way in which people react, generally, by having the cheaper space heat that insulation provides by turning up the thermostat. More importantly insulation saves some energy expenditure on space heat, not on power or on water heating. It does not create energy.

Statistically the average home on the gas network spends two thirds of its gas bill on space heat and one third on water heat. Insulation, so beloved as a simple panacea, is helpful, very helpful, but the problems that we face in terms of energy – price, security and carbon emissions and other pollutants – cannot be mitigated by any single solution, and we would do well to remember that.