Will petrol cost £6 per gallon in 2008?

By Fergal Barry-Murphy. Published on April 4, 2008 This post currently has no comments.

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This time last year we predicted that petrol prices were going to exceed £5 per gallon in the near future. This has already become a reality. In fact, we are now facing further oil price rises and could be paying £6 per gallon at the pumps before the end of this year. We have a closer look at what to expect in the months ahead.

The cost of a litre of petrol at the pump now costs somewhere between £1.08 (£4.91 per gallon) and £1.13 (£5.14 per gallon). Meanwhile, diesel costs £1.13 in some areas (£5.14 per gallon) and £1.18 per litre in other areas (£5.36 per gallon).

Most of this cost goes directly to the Government in taxes. There has already been one tax hike on fuel recently, and there is another one due in October that will add 2p to the cost of a litre of petrol or diesel, or about 9p per gallon.

This hike is inevitable, and so it seems are general increases in oil prices worldwide. Oil prices did fall back towards the $100 per barrel mark last week after rising to a record high of above $109. While this is encouraging, analysts believe that prices will continue to creep up.

Oil cartel Opec has refused to increase oil production despite rising prices and demand. Oil prices have doubled in little over a year and quadrupled since 2002, and many analysts believe that this trend is to continue in the medium term at least. If they are right, we could easily see the petrol prices hit the £6 per gallon mark before the end of the year.

So why are oil prices so high? Well, the main reason is demand. Supplies are finite and the demand for oil is increasing dramatically as the Chinese and Indian economies develop. Demand in the Western world is also on the up, despite attempts on the part of governments here to cut carbon emissions.

Ups and downs in oil prices also tend to be seasonal and can be related to demographics. For example, oil prices tend to spike during the summer months because it is the traditional 'driving season' in the United States when many people travel there.

However, it is usually geo-political issues that determine costs, the political situation in the Middle East being the main example. The recent surge in prices to over $109 per barrel was caused by an attack on an oil pipeline in Iraq. Much will depend on the ability of the coalition forces to keep peace and order in that country.

And finally, weather conditions can also play their part. A severe summer storm season in the United States always pushes up prices as it can lead to the closing of wells there. So, if we are to see a major increase in oil prices during the remainder of the year we should have a good idea by the end of the summer. While prices may not hit the £6 per gallon mark in 2008, we think they will get pretty close and could exceed it within 18 months.

If you haven't started thinking about it already, you should start to consider how you can cut your use of fuel. Maybe think about driving less, or buying a hybrid car. Or if your heating bills are high, see how you can insulate your home better.

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