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Oil prices: What's happening and what does it mean for you?

With the cost of energy soaring, a mature man resorts to outdoor winter clothing to stay warm rather than putting on the heating
The skyrocketing cost of energy and fuel means many people will be restricting their heating use this winter. Photo: Getty (Justin Paget via Getty Images)

Oil prices have been all over the place for the past month – rocketing to around $95 a barrel, before dropping to $84, surging towards $90, and then dipping again. Prices are being yanked around by the push-me-pull-you of global forces which feel far removed from everyday life, but they’re going to affect us all.

The reason for the all the volatility is that there are conflicting pressures from the wider world. There are growing concerns about a global economic slowdown, which has led to expectations that demand for oil will be much lower in 2024. This is pushing prices down.

Meanwhile, there are supply issues pushing prices higher. Previously this was driven by suppliers keeping a tight lid on how much they’re pumping, but now horrific events in the Middle East are dominating people’s worries. Of course, anyone’s biggest fear is for those caught up in this terrible tragedy. However there are also implications for oil prices.

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The uncertainty over what will happen in the region means we don’t know whether supply issues will dominate and keep pushing prices up towards $100 a barrel, or whether economic woes will keep them at current levels – or push them lower. However, if you pull back further than a month, and look at oil price movements since the onset of the pandemic, they’re far higher right now.

Read more: Why petrol and diesel prices don't fall with oil prices

Higher oil prices have had a profound impact on our pockets. Energy bills were the most drastic change, and soared so spectacularly that the government stepped in with the energy price guarantee to keep average annual bills at £2,500. From July this year, energy prices finally dipped below this level, and currently the price cap is £1,834. Any drop from the eye-watering levels of last year is welcome, but it’s worth putting this in context. In January last year, the cap was just £1,277, and at the time that was the highest the cap had ever reached. We’ve seen a step change in our energy bills, which is why 43% of people say it’s now difficult to pay them.

Oil price rises also drive petrol prices higher, so a litre of unleaded currently costs 156.97p. This is down from the peak of 191p last summer, but has been rising for the past month or so, and is still way ahead of usual levels. When the Office for National Statistics asked people about the prices that had risen over the previous month, fuel was the second most common answer – at 65%. Prices hit so hard that 31% of people said they were driving less to save money.

Read more: Energy bills - What to expect this winter

Frustratingly petrol prices are known to go up like a rocket when oil prices rise, but then come down like a feather when they fall, as there’s more opportunity for business involved in the supply chain to make a profit. It means that even if oil prices fall from here, we may be stuck with higher petrol prices for a while to come.

But this is far from the only way that oil prices feed into inflation. The impact is everywhere. If you look at something as simple as a bottle of milk, higher energy prices play a part at every stage in its supply chain. It costs more to run the farm – because of the cost of energy to run milking equipment, diesel for farm equipment and fertiliser (the manufacture of which is highly energy intensive). It then costs more to bottle, given the cost of heating for pasteurisation and the extra cost of making plastic. Then it’s more expensive to transport to the supermarket, because of fuel costs. Finally, the retailer themselves spends more to heat and light their shop, and it all adds up.

The jury is still out on what will happen next to oil prices, because so much depends on the unknown. The only thing that’s certain is that they they’re going to remain incredibly sensitive to global forces. It means we’re likely to see ups and downs at the petrol pumps, and that when it comes to the energy price cap, there’s always the risk we’ll take one step forward and two steps back.

Watch: Putin warns expanded Middle East conflict would raise oil prices

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