Mail Online - 05 April, 2011

Oil prices have hit an all-time high in Sterling terms, in a surge which increases the mounting pressure on Bank of England interest rate-setters.

The impact of the weaker pound, which declined 17 per cent in value in the past two years, means the Sterling value of Brent crude oil has risen to a record high of £74.60 per barrel.

But at 121 US dollars a barrel, Brent crude is still below the 147 US dollars a barrel record set in the summer of 2008.

The increase will provide another headache for policy-makers at the Bank of England, who are battling rising inflation, which hit 4.4 per cent in February, and sluggish growth.

However, that figure masked a huge spike in the cost of transport services, which rose more than 10 per cent and fuel prices which rose almost 16 per cent, according to the Financial Times.

The Bank's Monetary Policy Committee is under huge pressure to lift interest rates to curb the soaring cost of living.

However, following the shock decline in the economy in the final quarter of 2010, rate-setters are likely to hold fire for the time being as they wait to see how Britain has fared in the early part of this year.

The increase in oil prices, magnified in the UK by the weakening pound, is likely to be passed on at UK petrol pumps and add yet more pressure on already-squeezed disposable incomes.  The rises have been triggered by unrest which has hit production in Libya.

There has also been a lack of supply co-operation in Iran and strikes in west Africa. Iran, Opec's second largest oil producer, has refused to offer relief on supply in the wake of the Libyan civil war.

The country's oil minister yesterday said there was no need to call an emergency meeting to discuss a price-drop despite backing from Saudi Arabia and Kuwait.

The cocktail of supply pressures across Africa and the Middle East.was worsened by a labour strike in the West African oil-producing country of Gabon. Oil giants Total and Shell shut down production in the country, which normally pumps out 240,000 barrels a day.

This morning Shell said output in Gabon is expected to be back to normal within days after the union has agreed to end their strike.

Fuel prices at the pumps have reached new record highs, with diesel passing the 140p a litre mark for the first time last month, according to the AA.

The average cost of petrol is now 133.46p a litre, with diesel at 140.01p a litre.

Even after fuel duty was cut in the Budget, a litre of unleaded carries 20 per cent VAT and 58p tax. When oil hit its record high in June 2008, VAT was at 17.5 per cent and duty was 50p, says the FT.

Soaring oil prices have already wiped out the 1p fuel duty cut announced in the Budget, according to latest figures from the RAC.

It said the average price of petrol is now 133.55p a litre, which is 2p higher than the average price on March 23 when the duty cut was announced.

RAC motoring strategist Adrian Tink said: 'The volatile oil market has meant that drivers have seen very little benefit from the duty cut. Prices are continuing to spiral upwards with no end in sight to the high prices.

'The Chancellor made a great deal about the 'Fair Fuel Stabiliser' but it's only stabilising Government revenue. Motorists are still going to be hit by the rising cost of fuel.

'And just to add to the pain, the delayed inflationary increase of 3.02p is due to come in on January 1. Who knows what the price of fuel will be at this point?'

Paul Horsnell, head of commodities research at Barclays Capital in London, says British drivers have to cope with the weakening pound, the rising cost of oil and higher petrol taxes: 'All together, it is a very large impact.'

Energy Minister Chris Huhne said the current high price of oil does not reflect the realities of supply and demand in the market.

Speaking in the Middle East ahead of a meeting with Saudi oil minister Ali Ibrahim Al-Naimi, Mr Huhne said: 'There is no shortage of supply, and yet the price has remained high.

'International energy markets should understand that the current price of oil does not reflect the realities of supply and demand.'

The record prices will fuel the debate at the MPC's rate-setting meeting this week.

There have been a growing number of MPC members voting for a rise in rates over recent months in light of rising inflation.

At the March meeting, Andrew Sentance voted in favour of a 0.5 per cent increase, while Martin Weale and Spencer Dale backed a 0.25 per cent rise.

But economists predict a deepening consumer spending slump will see rate-setters remain in 'wait and see' mode until August at the earliest.  (original link)