Petrol prices highest since WW1

By my calculations, petrol prices have not been higher since the late 1910s. What's next?

According to the AA, petrol prices are unlikely ever to go below 110p a litre again, even though fuel costs are on their way down again.

The reason for this is a combination of increasing fuel duty and measures by Opec (an alliance of oil-producing nations) to control the price of oil, usually by restricting its supply. The AA argues, in fact, that we will never see prices fall below the £1 mark.

What's causing high prices?

From the 1930s to the 1990s real UK petrol prices (that is, excluding inflation) have spent most of their time in a fairly narrow price range. Today, at an average price of more than 120p/litre of unleaded petrol (as reported in Petrol price hikes trigger supermarket price war) they're about 40% higher than the long-term trend.

There have been just two times in the past 108 years when prices have risen so dramatically. In the mid to late 50s, shortly after a post-war period of petrol rationing ended, they were as high as today. During WW1, they were the equivalent of about £1.90/litre in today's money. At more than 50% higher than today, that is also a peak of double the average price from the 30s through the 90s.

Since the end of the 90s, crude oil has doubled in price (according to the Guardian, which took data from both the AA and Platts) making this the main cause for automobile fuel increases for the past decade.

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Hence, it's a combination of both that has caused our rapidly growing prices over many years.

This year we've had both problems, which explains the recent big jump. On 1 January, VAT went back up to 17.5%, which added a couple of pence to the cost of petrol and diesel. An increase to fuel duty and a scrapped subsidy has added about 2p extra from the beginning of April (with more due to come later in the year). Plus, the AA reported that wholesale prices went up 17% this year till the middle of April, which will have put another 5p or so on top.

A few weeks ago wholesale prices had their first pause of the year when they dipped two pence, and this is just now being reflected in the recent supermarket petrol-price war.

All that pretty accurately follows the jump in the cost of car fuel so far this year. The AA says we now have the second highest diesel prices in Europe, but if you want some surprisingly good news, we have just the ninth most expensive petrol prices.

What's next? you ask

If by next you mean the next decade, then it's likely that prices will somehow begin to return to their long-term trend, which means they'll start to fall perhaps as much as 40%. Commodity prices, just like asset prices (e.g. shares and house prices) have always returned to trend previously, even though each time people say 'this time it's different'.

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The good news is that for most of the 20th century the commodity-price trend was generally flat or even downwards, even when some pretty large countries (e.g. Germany) were rapidly industrialising.

Thing is, it could take a long time for, say, innovation, investment or a change in petrol-tax policy to bring prices right back down, so when you ask 'What's next?' you probably meaning the next two to 12 months. That's not something anyone can answer, unfortunately, unless you're close enough to Chinese Premier Wen Jiabao to ask him what China's investment plans are for the year. However, if you want to fix the cost of your petrol prices just in case, take a look at this lovemoney.com article: Fix the cost of your petrol! Alternatively, for some tips to cut your petrol costs, read Petrol price hikes trigger supermarket price war or cut your other fuel bills by as much as 25%.

More: Free online banking tool | Fix the cost of your petrol! | Petrol price hikes trigger supermarket price war