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I was driving my diesel car up the motorway listening to Radio 5 on Friday, when the AA report on fuel prices came out. The average price of diesel at the pump has just gone to a new high, 143.05p a litre.
This came just a few days after we were told that inflation was falling.
A lot of people were upset – and understandably so. High fuel prices drive up the cost of doing business and the cost of living.
Experts and callers all chimed in with suggestions as to why the price is so high – excessive duty, supply constraints in Europe, refinery problems, the weakness of the pound against the dollar, price fixing, tensions in the straits of Hormuz.
There’s something to all of these.
But not one person mentioned the elephant in the room. It’s an elephant that I keep coming back to. Verging-on-the-unaffordable diesel is yet another consequence of the deliberate policy of governments and central banks to devalue money…
Why is the diesel price so high?
There are certain mysteries surrounding the diesel price. Why is diesel more expensive than petrol, when it used to be the opposite? Doesn’t diesel require less refining than petrol and less crude oil to produce – so shouldn’t it therefore be cheaper? And how come diesel’s cheaper than petrol on the continent in, say, France?
A commonly cited answer for this is tax and, yes, the high cost of diesel has plenty to do with tax. Some 75% of your £1.43 goes straight into the pocket of our glorious government, which then uses it to invest in things like NHS IT systems or RBS.
But tax doesn’t explain the relative expense of diesel. The UK duty rate for the road fuels is the same, whether it’s unleaded petrol, diesel, biodiesel or bioethanol.
On the continent, however, various diesel subsidies in certain countries have led to the discrepancy in prices.
As for refining, there are some misconceptions. Old-fashioned diesel requires less crude oil to produce, and less refining than petrol. Hence the heavy clouds of black smoke you used to see behind a bus or a lorry.
But the modern ‘clean’ variant – ultra-low sulphur diesel, made to modern established standards, and now the norm – requires a more complex refining process. You can refine less ultra–low sulphur diesel from a barrel of crude than you can petrol, unless you use some extremely expensive refining processes.
There have also been issues at the Coryton refinery in Essex, leading to a slight disruption in supply.
Neither petrol nor diesel are terribly transparent markets. The price ranges quite considerably by area, for example. Some supermarkets even sell diesel at a small loss, just to get punters onto the premises. When you get these discrepancies and lack of transparencies, paranoid theories always start to emerge – many of them to do with price fixing – and many of them wrong.
But the fact is that refining, location, pricing are all normal market forces. And they’re not going to change prices by more than a few pennies – 5% maybe or, in extreme cases, 10%.
The bottom line is that – regardless of what fuel you’re using – it has become very expensive to fill up your tank. I’m not sure people really mind that diesel is more expensive than petrol – they just mind the fact that both are expensive. And both, ultimately, are driven by the price of oil.
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Oil prices have rocketed – measured in pounds sterling, at least
If you look at a chart of oil since 1999, and ignore the speculative excess of 2008, the broader trend is not hard to see. Oil, whether crude or heating, is in a long-term bull market. Here is the US dollar price of Brent crude since 1994.
(My thanks as always to Nick Laird of Sharelynx – www.sharelynx.com – for the charts.)
This bull market is partly driven by declining supplies and increased demand. Global oil production peaked in May 2005 and despite the higher price, this level of production has not been matched.
The fact that companies are now having to drill miles under the sea or in other undesirable locations, suggests that the easy–to–find ‘cheap’ stuff has long since been found. There may be something to this peak oil business after all.
But even this can’t account for the whole story. After all, the supply of oil has not fallen by that much. A few percent maybe. The real difference is in the supply of money – which has rocketed.
Here is a chart of Brent, priced in pounds. You can see the oil price is above the 2008 highs. From the late 1998 low of £5.77 to the current price around £75.50 is a move of around 1,308%. Blimey!
A technician might look at that chart and declare that the 2008 high – £75 or so a barrel – will now become support. In other words, these high prices are here to stay. We’ll see.
Now let’s look at a long–term chart of Brent priced in gold. In other words – how much gold does it take to buy a barrel of Brent?
Gold, of course, cannot be devalued to anything like the same extent as governments’ own issue. And we see that the oil price is the same as it was in 1996.
It’s 0.02 of an ounce (50%) more expensive than it was at the extreme lows of 1999, and it’s 0.07 of an ounce (50%) cheaper than it was at the extreme highs of 2008.
The price fluctuates, yes. It should. That is normal. But there has been nothing like the same range of movement as with pounds, where oil has enjoyed that 1,300% move. How much easier would it be to plan and run a business, a home or indeed an economy, with a more stable money such as this?
I have no doubt that oil companies, petrol stations, refineries and any other company operating in the diesel market are all trying to make as much money out of you as they can. But there’s only so much they can charge before the customer goes elsewhere.
The real reason the diesel price is so unaffordable is that modern money is being systematically debased to bail out the profligate, be it the government, the banks or anyone else who has spent more than they can afford.
And you can brace yourself for more of the same.
• This article is taken from the free investment email Money Morning.
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