Critical Overview: On Monday, experts warned MPs on the Treasury Select Committee that the recent invasion of Ukraine by Russia could result in a significant increase in petrol and diesel prices. The committee was also informed that diesel may be rationed, and the chancellor was urged to subsidize low-income households to help them cope with the rising cost of home energy bills. The price of petrol has already reached an average of 163.5p per litre, while diesel is at 173.4p per litre. If the geopolitical tensions persist, fuel prices could rise further, and diesel prices could even double.
Potential for Soaring Fuel Prices: Nathan Piper, the head of oil and gas research at Investec Bank, advised that consumers must be prepared for continued rises in fuel prices. He added that there is no limit to how high the prices could go. Dr Amrita Sen, a founding partner and the chief oil analyst at the research consultancy Energy Aspects, warned that oil prices could increase by 50%, and petrol prices could reach £2.40 per litre. Due to diesel’s significance in the industry, it could go as high as £2.50, and even closer to £3. Sen added that Germany might ration diesel before the end of March, and the same could happen in the UK.
Impact of Diesel Rationing: Diesel plays a vital role in the shipping lanes, trains, cars, and other industries, so rationing it could cause widespread disruption. Although the UK gets only a small amount of crude oil and gas from Russia, it imports around 18% of its diesel from Russia, making it vulnerable to diesel rationing. Piper suggested that the impact of diesel rationing would be felt more widely than just the industry.
Need for Subsidies and Investment: The Ukraine crisis has led to an increase in Brent crude oil’s price, and gas prices have reached an all-time high in Europe and the UK. Sen estimates that the additional cost to UK households could be up to £60bn a year if gas prices remain at peak levels. To mitigate this, Prof Jagjit Chadha, the director of the National Institute of Economic and Social Research, suggested that the chancellor could introduce a grant of up to £500 for low-income households in the upcoming spring statement. Sen, Piper, and Tony Danker, the director-general of the CBI, emphasized the need for greater investment in North Sea oil and gas as a stopgap, alongside significant investment in renewable energy.
Windfall Tax on North Sea Oil and Gas: Labour has proposed a windfall tax on North Sea oil and gas firms to pay for a £200 reduction in household energy bills. However, Piper argued that the amount raised would be “de minimis” because the most profitable companies like BP and Shell produce relatively little from the North Sea. The largest firms operating in the North Sea are mostly carrying significant tax losses because their investments have been unsuccessful.
Rethinking Ban on Fracking: Fracking has been suggested as a possible solution to achieve energy security and bring down gas prices, but Piper referred to this idea as a “red herring.” Francis Egan, the chief executive of the UK fracking company Cuadrilla, expressed his displeasure at the government’s apparent change of policy towards fracking. The UK imposed a moratorium on fracking in 2019, and the Oil and Gas Authority ordered Cuadrilla to plug two shale gas wells in Lancashire earlier this year. Egan believes that the government and the OGA should withdraw their instruction to plug the wells and put sensible protections in place to prevent companies from suffering financial loss when the government changes its mind.
Conclusion: The potential for soaring fuel prices, diesel rationing, and rising home energy bills due to the Ukraine crisis highlights the need for significant rethinking of fuel supply and distribution chains.