Why petrol prices will hit £5 per gallon

Do you ever feel a sense of deja vue?  I wrote that petrol may soon cost £5 per gallon in April 2007.

And now we are hearing that petrol is soon to hit £5 per gallon again soon.  Blame it on oil speculators, the government, the dollar….

We can blame high petrol prices on many things, almost all of them out of our control, but why are prices at the pumps increasing at the moment?

The root cause is the dollar.  The weak Pound isn’t helping either.

As investors flee the ailing dollar, they look for other markets to invest into and oil is one of the beneficiaries, particularly as it is priced in dollars.

So as the dollar falls, generally the price of oil rises.

Oil prices also rise as a response to increased usage by manufacturers and consumers throughout the world so as economies improve, they use more oil.

But that isn’t happening now. In fact oil inventory figures published last week showed that oil usage is falling at the moment as perhaps economies are not as strong as they should be in this stage of economic recovery.

Another fact.  So much oil has been extracted, but is not being used, that oil tankers are anchored at sea acting as floating mass storage.  Oil storage is so sought after that the costs of  storing all those barrels is rocketing.

So increasing demand for oil is not causing prices to rise when we fill our cars up.

It is the weak dollar causing the problem. The weakness of the Pound against the dollar then makes the matter worse as we have to spend more Pounds to buy the same number of those vital barrels of oil.

This is a problem for you and me, and the government because the low interest rates that make variable mortgages rates attractive is hurting the Pound.

This means that at a time when the government is trying to boost our economy with low borrowing costs, oil is ruining the party by increasing inflation and that harms economic recovery.

Updated 11 May 2010

Well petrol is now well and truly over £5 per gallon and in fact we have found it being sold for more than £6 a gallon as you can see in this video:

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