How Colonel Gaddafi could cost you money

Robert Powell investigates how unrest in the Middle East could push up prices here in Britain.

Whatever your politics, it’s hard not to feel inspired by the recent uprisings in Tunisia and Egypt. Look to Libya however, and – for now at least – the feeling is quite different.

Libyan leader Colonel Muammar Gaddafi this week reasserted his intention to keep hold of power, laughing at the very prospect of leaving his ‘homeland’. But the same can’t be said for swathes of the Libyan population who have been attempting to flee the country since the revolt began.

But as Libyan border crossings reach breaking point, the economic echoes of this crisis are also reverberating out of the North-African country and into wallets around the world.

One major way the Libyan revolt, as well as the wider ongoing crisis in the Middle East, can impact on your finances is through the price of oil.

Talk about oil markets is littered with complex, scary sounding jargon; so I’m going to try to simplify the matter. First I’ll consider what is causing this price rise, before looking at exactly how oil rises can affect you and what you can do to mitigate the impact.

The fear

Libya is the 13th largest crude oil exporter in the world and a major producer of the light, gasoline rich type of oil that is easily turned into vehicle fuel. So as the Libyan revolt shut down oil bases and the country’s output dropped by around 33-50% (depending on who you believe) the price of oil shot up, settling at a two-and-a-half year high of $115.42 per barrel on Tuesday night (1 March).

As well as the unrest in Libya, ongoing instability in other oil-rich countries in the Middle East continues to stoke market fears and drive prices up.

Oil price spikes like these are caused by an increase in demand or (as is mainly the case now) a lack of supply. But most of the time the perceived lack of supply felt by the market is not actually mirrored in reality. By this I mean that while the oil supplies will undoubtedly run out one day, at the moment there’s still plenty to go around. It’s just the ‘fear’ of oil running out that’s pushing prices up.

So when Saudi Arabia – the world’s largest oil producer – confirmed that it had met all demands for extra oil to replace the barrels lost from Libya, the market calmed down and prices dropped.

But if unrest appears within Saudi Arabia, as it may well do if a planned ‘day of rage’ takes place in the country on 11 March, then oil prices will almost certainly soar.

But how does this affect you and me?

Motor costs

The obvious impact rising oil prices has in Britain is on the cost of petrol. Experian Catalist estimates the average cost of unleaded petrol is now at a record high of 130p per litre.

Petrol prices have risen by approximately 6% since the end of last year, but as we reported in How to beat record petrol prices this is not solely down to soaring oil costs. January’s VAT rise along with increased fuel duty has also pushed up the cost of petrol.

In fact, petrol costs were even rising in Britain when wholesale oil prices were falling across Europe – leading many to accuse filling stations of ripping off motorists.

Rising oil prices are also hitting airlines with Thomas Cook and Tui Travel adding supplements to their holidays and flights because of the high cost of fuel. Both operators have added a £15 charge per person for short-haul flights, £25 for mid-haul and £40 for long haul.

But fuel isn’t the only commodity that rising oil prices affect.

Not just petrol

After it is refined, crude oil can ultimately end up in thousands of products from asphalt, lubricants, heating fuel and plastics to photographic film, food additives, pesticides and dyes.

Indeed at some level, almost everything is dependent on crude oil. This is why many are predicting that a rise in the price of oil could add to the already spiralling inflation rates in Britain.

Fathom Financial Consulting predicts that if oil prices stay between $110 and $120 per barrel, the Retail Price Index (RPI) of inflation will be pushed up by between 0.4% and 0.5%.

Considering that RPI is currently running at a staggering 5.1%, any prolonged period of high oil prices could hike inflation even further, forcing the Bank of England to raise the base rate. Find out why by reading Base rate set to rise by May.

So what can you do to fight back against these rising costs?

Avoid rising fuel costs

Beating rising petrol costs isn’t as hard as you may think. Ensuring your car is as cost-friendly as possible should be your first port of call. A 100kg load can reduce mileage by up to five miles per gallon, so make sure there are no unnecessary items in your car.

As well as being dangerous, under-inflated tyres can also add 3% to your fuel bill – so check yours are at the right pressure.

Making sure you shop around for the cheapest petrol using sites like petrolprices.com and keeping an eye open for any supermarket offers will also help reduce your fuel bill. You could also pay for your petrol using a cashback credit card and earn money anytime you pay for fuel! Read our How to beat the petrol price hikes guide for some more tips.

The best way around pricey air fares is to simply book any flights well in advance using a price comparison site like Yahoo Travel or Skyscanner. Alternatively, you may find that leaving it to the last minute, and being pretty flexible about when you can fly, will also bring down the price.

And if you’re on the lookout for a budget break this year you should read The cheapest holiday destinations for 2011 for some advice.

Inflation

Fighting back against inflation and general everyday cost rises is more difficult, but we have loads of great articles and resources here at lovemoney.com to help you save a few pounds every day.

If you’re a saver, then you’re probably shuddering at the very thought of high inflation rates eroding away your hard earned cash – especially when interest rates are so rubbish. But there are a few ways you can protect your savings against rising costs.

BM Savings has just upped the interest on its inflation busting bond to 1.50% above RPI bringing it in line with the Post Office’s own Inflation Linked Bond. To find out more about these bonds, as well as the Yorkshire Building Society inflation linked account, head over to Take this chance to earn 6.6% on your savings.

Our how-to guides also have loads of great tips on savings a few pounds and making some extra cash. Try out the cut your food bills and set a budget guides to start with and then read the build your savings guide when you’ve got on top of your spending.

More: Get a great savings account | Banks, bonuses and blame! | Inflation rockets to 4%