The UK’s announcement that it will phase out Russian oil imports by the end of the year is set to have an impact on consumers already feeling the pain from surging inflation and high energy and fuel bills.
The government also said it was exploring options to end Russian supplies of natural gas to the UK, which make up less than 4% of the country’s total.
Here’s what the UK’s move to replace the 8% of Russian oil could do to bills:
Household energy bills are already set to go up in April, and the new move could mean bigger rises will come later in the year, by putting more pressure on oil and gas prices. Brent crude jumped to $133 per barrel on Tuesday, close to the 14-year high hit on Monday.
The good news of sorts for households with standard gas and electricity supplies is that the Ofgem energy price cap that applies to bills stops providers from putting up variable tariffs anytime soon. The higher price cap that takes effect on 1 April will be in place until the end of September.
The cap will be updated in August, with the new ceiling taking effect from the start of October – so a lot will depend on the state of the energy market at that point. Some experts had already suggested that average annual bills could reach £3,000, and this latest announcement heightens the chance of that happening.
Even if the wholesale cost of gas has gone down by the summer, in the shorter term rising prices will put pressure on suppliers. If more go to the wall, there could be greater costs in the pipeline for customers.
Standing charges for electricity are going up by about 80% in some cases in April to cover the cost of last year’s energy company collapses and, if more go bust, the cost of looking after their customers will filter through to bills eventually.
For those off the gas grid, the pain will be much quicker to hit home. Heating oil prices have rocketed in recent days – according to the website BoilerJuice, the average price of a litre of heating oil had gone up from 66.77p on 23 February to 117.83p on Monday. A squeeze on global supply will push that up.
Gas and oil prices are a big factor in how much we pay for food, and if they continue to rise, so will the cost of groceries. Fertiliser prices have surged on the back of rising gas prices, and will mean farmers need to charge more for everything they produce.
Cooking oil prices have already gone up, with one of the drivers being demand for the crops for biodiesel. Soaring oil prices will add to that pressure. Rising prices for cooking oil will have a knock-on impact on all kinds of foodstuffs – margarine, peanut butter and long-life cream are just some of the products that contain it.
The move will put yet more upwards pressure on prices at the pump, which – it was revealed on Tuesday – have just gone up by the biggest weekly amount for years. The cost of filling up a 55-litre family car has gone up by more than £2 in a week, according to government data issued on Monday 7 March.
“Russia is our biggest source of diesel outside the UK, supplying 18% in 2020 but hovering around 15-20% annually,” according to a report in Autocar.
However, the Department for Business, Energy & Industrial Strategy (BEIS) said that “more than two-thirds of our road fuel comes from domestic production”.
The new move will be phased in over several months, giving the markets a fair bit of time to adjust, and allowing for alternative suppliers to be found, though whether that is enough to stop motorists panic-buying remains to be seen.
The average price of a litre of petrol at UK forecourts rose from 149.2p on 28 February to 153p on Monday (7 March), according to BEIS, while average diesel prices rose from 153.4p to 158.6p over the same period.
Higher interest rates
Rising inflation would usually mean higher interest rates. The Bank of England is tasked with keeping inflation at 2% – however, the annual rate of price growth had already reached 5.5% ahead of Russia’s invasion of Ukraine, and rising petrol and food prices will push it up further, with some economists predicting inflation of almost 9% by the end of the year.
But the Bank will be aware that households face higher costs, and may decide not to pile on more pressure by raising borrowing costs rapidly, as some have been predicting. When it meets next week, it could opt to raise rates from 0.5% to 0.75%, rather than to 1% as some commentators have predicted.
If the bank does increase rates, that will add to mortgage costs for those on variable-rate home loans, and could push up the price of new personal loans.
Fixed-rate mortgages have been so cheap that most homeowners and landlords have them, and so they will be shielded in the short-term at least from rising costs.