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Motoring costs to increase?

Wednesday, November 16 2016 :: Keywords: car insurance prices, car servicing, fuel prices, new and used car prices :: Permalink

Last month the Petrol Retailers Association warned motorists that pump prices are set to increase by at least four to five pence per litre as the cost of crude oil strengthens along with the US dollar, which is the principal currency used to buy oil. However, we are still a long way off the dark days of April 2012 when unleaded cost 142.5 pence per litre. Crude oil is heading towards 60 dollars per barrel, but this is still well off the high of 133 dollars in July 2008.

The strength of the dollar is a worry. We say ‘strength’ of the dollar rather than weakness of the pound, because the dollar appears to be getting stronger against most other major currencies. The reason is, in part, investors looking for a safe haven as the world’s economy runs out of steam - and the prospect of an interest rate rise by the US central bank.

Undoubtedly Brexit is a factor, too. The slide in the euro against the dollar has been less severe than that of the pound. The relative weakness of the pound against the dollar and the euro means motoring costs will increase. Fuel will be more expensive as will oil products, spare parts and new cars, particularly those imported from the European Union.

The majority of spare parts are imported and the European Union is an important source. The pound has fallen 18% against the euro in the last twelve months. This will eventually have an impact on the prices of spare parts once currency hedges expire and stockists’ margins come under pressure - although in a very competitive market stockists will likely seek out the best deals for themselves and their customers.

Car insurance is an expensive purchase and the repair content will be impacted by the weakening pound (spare parts) and rising oil prices (paint), although ever more complex cars will probably add most to repair costs. Over the longer term, though, insurance premiums peaked in 2012 according to the AA, and then fell until the first quarter of 2015 rising by over 20% by mid 2016. Such a big increase in a short time hits motorists hard, but current premiums are still over 10% below the 2012 peak.

As for car servicing, maintenance and repairs, this cost fell substantially up to 2008 with extended service intervals, less content and more robust, reliable cars. During and after the recession, costs increased as people kept their cars longer but have since fallen to levels similar to 2008 in real terms.

Overall, a weaker pound and higher oil prices will hurt motorists, and knock on to other areas like insurance, servicing and repairs, and car prices and depreciation. The biggest hit could be higher new car prices and higher depreciation – the latter accounting for around one-third of motoring costs. However, relative to quite recent times, motoring costs will be affordable for some time to come. So don’t panic yet.

Written by Trend Tracker director Chris Oakham, this piece first appeared his column in the subscription monthly Auto Retail Bulletin.(See auto-retail.co.uk for subscription details.)



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