Why do diesel and petrol prices keep falling?

Since the end of July 2014 diesel and petrol have continued to fall in price. On Monday 28th July the price per litre of diesel was 135.63p inc VAT. Today the average inc VAT price per litre is 120.56p, making it 11.1% cheaper than it was almost five months ago.

Diesel and petrol prices keep going down simply because the price of oil has been falling week on week since the middle of June. Brent Crude Oil was $112.60 per barrel, but today it is now just $60.22 per barrel. OPEC oil prices also started to go down in the middle of June and at a very similar rate.

The reason for the drop in price:

US oil production has risen to 3.6 million barrels a day from 2008 due to the extraction of shale oil in North Dakota and Texas. In addition Russian and Canadian oil production has also increased.

Up until the summer of 2014 prices held because of unrest in the Middle East; a civil war in Libya, troubles in Iraq, as well as American and European oil sanctions on Iran meant that there were 3 million less barrels of oil on the market every day.

With many of these problems easing, world production of oil is on the increase. But the demand for oil from Europe and Asia is decreasing, thereby swinging the balance between supply and demand.

Despite falling prices, OPEC have chosen not stem their daily production of oil in an effort to prop up prices, a tactic they used in the 80s. OPEC is an oil cartel, which includes Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Libya, the United Arab Emirates, Algeria, Nigeria and Angola. In fact just last weekend, Ali al-Naimi (Saudi Arabian Minister of Petroleum and Mineral Resources) told the Middle East Economic Survey it was “not in the interest of OPEC producers to cut their production, whatever the price is”.

OPEC is hoping that by not intervening in the oil markets the price will continue to go down and force many of the new oil drilling projects in the US to become unprofitable and close down. The fact is the OPEC oil producing countries and the US are in a price war with each other.

All of this means we are now enjoying lower retail prices on diesel and petrol. Although it is worth noting that the downward price trend of fuel at the pumps is following at a lower rate of decline than that of crude oil.

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