How could Brexit impact fuel prices?

We’re living in uncertain times. The Brexit process is likely to bring with it a range of surprises and impact on many areas of daily life. One of those areas is the cost of fuel. As such, we’ve taken a look at recent historical events to assess their impact on fuel prices, in order to try and predict what Brexit, the forthcoming general elections in the UK and Europe, and Britain’s final exit from the EU could have on fuel prices over the next two years.

Recent historical factors

The first major recent historical factor to affect fuel prices was OPEC’s decision to increase fuel production in November 2014. The decision to oversupply was to try to prevent competition outside of OPEC from getting the funding and traction needed to extract fuels from shale oil and fracking projects. By January 2016, fuel had dropped to 98p a litre. The last time it was at that level was in May 2009, during the financial crisis.

Between January 2016 and the June referendum on whether the UK should remain in the EU or leave, fuel prices rose by 10p a litre. When British voters chose to initiate the process to leave the EU on 23 June 2016, it led to an immediate fall of 20% in the value of the pound against the dollar. Some experts went as far as hailing “the end of cheap fuel in Britain.”

However, fuel prices went up by less than a 0.3p per litre in July, then went down by 1.4p per litre in August. Fuel prices did start to rise in September, but driven by the increase in the cost of crude oil per barrel, not Brexit.

Another major recent historical factor was Donald Trump winning the US Presidency. Trump is known for his support of shale oil extraction and hydraulic fracturing (fracking). Although we saw no change in prices for his inauguration in January 2017, by February OPEC had decided to reduce oil production in anticipation of a likely increase in US oil output. This saw average prices rise by 5p a litre.

Thus, while recent fuel prices haven’t changed as a direct result of political events, those events have impacted on currency value. That has been paired with the decisions taken by the major oil producing countries, impacting supply and the price of crude oil per barrel.

General election

The direct impact of the snap 2017 general election announcement has been increased confidence in the financial markets that Brexit will be delivered. This has led to a stronger pound (up by 2.5%) and a resultant decrease of 2p a litre on fuel.

However, before the election on home soil, there is also the French election. This has the potential to cause a major upset in the financial markets if the far-right leader Marine Le Pen wins. It could mean fuel prices fall by as much as 5p a litre, as the value of the euro could drop and thus benefit the pound.

If, as expected, the Conservatives win the UK general election by a large majority (of 100 seats or more), the value of sterling would likely rise again. This could perhaps reduce fuel prices by a further 2p a litre. In the unlikely event of a small majority or hung parliament, negotiations with the EU could become very tricky, while shaky confidence in Brexit being delivered could lead to a further devaluation of the pound. This has the potential to take fuel prices back above 120p a litre.

Agreeing the exit and ‘divorce settlement’ terms

If the UK fails to agree on the terms of its exit and divorce settlement from the EU, it will face the possibility of a ‘hard’ Brexit. That means going outside of the EU and trading using World Trade Organization tariffs. The likely result would be an immediate slump in the value of the pound, with fuel prices increasing by as much as 20%. Such events have the potential to trigger another recession, as the shock on the heavily indebted UK economy would prompt many businesses to shed workers and move investment away from the UK.

If the UK does reach agreement with the EU on the terms of its exit, then a ‘soft’ Brexit will be the likely possibility. This would potentially involve maintaining existing trade relationships within the European single market, but accepting certain conditions. This possibility could lead to fuel prices remaining the same as they are at present, or even decreasing slightly as confidence about stability of the EU holds fast.

Exiting and negotiating new trade deals

In June 2019, when Britain eventually leaves the EU, it is predicted by many that a period of uncertainty will follow. New trade deals and transition agreements will come into play as the UK is effectively left to fend for itself.

The uncertainty that surrounds the outcome of Brexit after June 2019 will likely manifest itself in fuel price fluctuations. We would expect to see sharp increases in prices coinciding with the temporarily weakened pound. Conversely, any good news about trade deals with new partners outside the EU could have a hugely positive impact on the pound’s value and thus on fuel prices.

One would anticipate that the government will prepare a series of quick trade deal announcements, to boost the economic outlook soon after fully leaving the EU. We expect deals with Commonwealth countries, such as New Zealand and India. A trade deal with an oil-producing country such as Saudi Arabia would also be a smart way to boost both the economic outlook and fuel prices at the same time.

It is almost certain that there will be many notable highs and lows in the cost of fuel during the Brexit process and beyond. We have done our best here to give you an idea of what you can expect fuel prices to do. However, the only certainty is that prices will be volatile during the Brexit process, so make sure you shop around and use our service to make sure you always get the best value.

What do you think the Brexit process will mean for fuel prices? Do you think a hard Brexit would be a good thing? Let us know in the comments below.