We noticed you're blocking ads.

Keep supporting great journalism by turning off your ad blocker.

Questions about why you are seeing this? Contact us

Font Size

- Aa +

Fri 11 Dec 2015 05:29 PM

Font Size

- Aa +

Why Britain's motorists should thank Saudi oil minister for cheap fuel

Saudi Arabia is relying on low prices and strong consumption growth, says Reuters analyst John Kemp

Why Britain's motorists should thank Saudi oil minister for cheap fuel

Britain's motorists have Saudi oil minister Ali al-Naimi to thank as the country's supermarkets cut the price of petrol to less than one pound per litre for the first time in six years.

Morrisons, the country's fourth-largest grocer, has cut the price of unleaded gasoline to 99.9 pence per litre, the lowest price excluding special promotions since 2009, and other supermarkets are expected follow, according to the BBC.

Brent prices have fallen to $39 per barrel for the first time since 2008/09 after the Organization of the Petroleum Exporting Countries (OPEC) failed to agree a production level at its meeting on Dec. 4.

Both OPEC and the International Energy Agency (IEA) have forecast the oil market will remain oversupplied in 2016, sending oil prices crashing to new lows.

Cheaper fuel as well as continued economic expansion and a faster rise in wages have combined to produce a surge in traffic on Britain's roads.

Traffic volumes rose by 2.2 percent in the 12 months ending in September compared with the prior period, according to the UK Department for Transport.

Traffic has increased for 10 consecutive quarters, for the first time exceeding the previous peak, set back in 2007 before the recession.

Traffic growth mostly reflects the steady increase in economic activity and employment but lower fuel prices may also have contributed, the department says.

The increase in traffic is the fastest and most consistent for more than decade stretching back to the early 2000s, before fuel prices started to climb sharply.

Vehicles sales are also booming, according to the Society of Motor Manufacturers and Traders, a trade association.

For the first time since 2004, new car registrations topped 2 million in the first nine months of 2015. In September, registrations reached their highest ever level for the time of year.

Surging traffic and vehicle sales look a lot like the United States, where traffic volumes increased by 3.5 percent in the first nine months of the year, according to the Federal Highway Administration.

US sales of cars and light trucks are on course this year to exceed the prior record set back in 2000, according to WardsAuto.

Cheaper fuel sales have also encouraged consumers to buy larger and more fuel-hungry sport utility vehicles (SUVs) and crossover utility vehicles (CUVs) rather than smaller cars.

Sales of light trucks, a category that includes SUVs and CUVs, are up 12 percent this year, while car sales have fallen by 2 percent, according to Wards.

As a result, US gasoline consumption has risen almost 3 percent so far this year, the fastest increase since 2005, according to the US Energy Information Administration.

Cheaper fuel may not last indefinitely. Saudi officials have indicated they believe oil prices of $60-80 per barrel will be needed in the longer-term to sustain investment in production.

"A prolonged period of low oil prices is ... unsustainable, as it will induce large investment cuts and reduce the resilience of the oil industry, undermining the future security of supply and setting the sharp price rise" in a few years time, Naimi's deputy warned a conference last month.

But in the meantime, cheaper fuel prices and rising consumption, coupled with a reduction in high-cost oil production, is an essential part of Saudi Arabia's strategy for rebalancing the oil market.

Saudi Arabia is relying on low prices and strong consumption growth to mop up some of the excess crude oil production in the market and help absorb extra Iranian barrels once sanctions are lifted in 2016.

Arabian Business: why we're going behind a paywall

Real news, real analysis and real insight have real value – especially at a time like this. Unlimited access ArabianBusiness.com can be unlocked for as little as $4.75 per month. Click here for more details.