‘Untold difficulties’ for UK: Petrol & energy bills could explode after Ukraine crisis

Ukraine: Economic action means little to civilians says Garraway

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British households have already been bracing for a major squeeze in the cost of living this year. Joe Staton, client strategy director of data research firm GfK, warned a “perfect storm” had been created over rising fuel and energy prices and hikes to tax and interest rates. GfK’s most recent survey of consumer confidence found it at its lowest point since January 2021 when the UK was in the middle of a winter lockdown. Crucially, this trend was already in place before the economic fallout of the Ukraine invasion began to play out – so how might an escalation further affect the economy here?

Petrol and diesel

As the world’s second largest exporter of oil, any disruption to trade with Russia has major potential to squeeze supply.

Oil prices have already been pushed up in recent months due to underproduction from the Organisation of Petroleum Exporting Countries (OPEC) which has so far missed targets to reverse production cuts made during the pandemic.

After steady gains, oil finally pushed past the $100 threshold this week with predictions of further rises to come.

Shaun Murison, senior market analyst at IG, predicted the long-term trend “remains firmly up”, suggesting a long-term projection of $119 (£88.69) a barrel.

If the situation becomes more extreme and Russian exports are significantly interrupted, consultancy Capital Economics predicted oil could reach as high as $130 (£96.89) a barrel.

Meanwhile, at the pumps, fuel has continued to set new records with motoring group RAC reporting petrol reached an average of 149.5p this week – while diesel reached 153p.

RAC fuel spokesman Simon Williams said: “If the oil price was to increase to $110 there’s a very real danger the average price of petrol would hit £1.55 a litre.

“This would cause untold financial difficulties for many people who depend on their cars for getting to work and running their lives as it would sky rocket the cost of a full tank to £85.

“At $120 a barrel – without any change to the exchange rate which is currently at $1.35 – we would be looking £1.60 a litre and £88 for a full tank.”

Consultancy Pantheon Macroeconomics meanwhile predicted petrol could reach as high as 170p a litre by mid-March.

Gas

Like oil, Russia is a dominant exporter in gas with 40 percent of Europe’s natural gas supplies coming from the country.

While the UK relies much less on Russian gas for its energy supply, a more constrained global market is likely to push prices up across the board with natural gas futures already rising 30 percent this week.

With changes to Ofgem’s energy price cap already set for the next six months from April, consumers will be protected for the time being, however sustained price increases could see a big jump in October when the cap is next reviewed.

Pantheon Macroeconomics predict the current price surges imply an increase of 33 percent in October.

This would mean a typical users would go from paying £1,971 a year to £2,621.43 a year.

Up until April, the price cap currently sees users paying £1,277 – meaning a typical household’s bills would have more than doubled in one year.

House prices

Inflation has already been growing in the UK with an expected peak of just over seven percent in April, however the price pressures – such as for energy and fuel – could make forecasts worse. Analysts now suggest a rise of over eight percent may be possible.

Inflation may also stick around for longer compared to the previous forecasts of a gradual levelling off later this year.

This, in turn, will increase pressure on the Bank of England which has already carried out consecutive interest rate hikes.

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Forecasts have suggested the base rate could go as high as two percent, pushing up borrowing costs for new mortgage applicants and potentially cooling the housing market.

Andrew Wishart, senior economist at Capital Economics, told The Telegraph: “We think a conflict would keep inflation higher for longer and potentially bring forward some rate rises.

“Earlier rate rises may mean house price growth cools a bit earlier.”

But some argue trends could go the other way for interest rates, with rising prices denting spending and reducing the need for higher rates.

Samuel Tombs, chief UK Economist at Pantheon Macroeconomics, said: “We doubt that the (Monetary Policy Committee) will be that proactive, given that higher energy prices will dampen domestic demand.”

He predicted: “We are sticking with our below-consensus forecast for the MPC to raise Bank Rate to only 1.0 percent this year, with a long pause following 25bp hikes in March and May.”

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