The mystery of our rising fuel prices

WHAT ON EARTH is happening to our fuel prices? In recent times the cost of petrol and diesel has regularly reached record highs, and the increases look set to continue in the coming weeks.

If price increases are maintained at their current levels, the average motorist stands to be worse off by more than €1,000 a year compared with just two years ago. In the short term at least, this looks likely, although prices could actually climb even more in the weeks ahead.

The price hikes on forecourts seem to fly in the face of the logic of the international oil markets as the spike is happening at a time when oil prices are relatively stable. A barrel of Brent last Tuesday morning was $112 (€87), slightly up on the previous week, as a weaker dollar, tension in Iran and strong economic data coming out of China, the world’s second-largest oil consumer, gave traders the heebie-jeebies.

This price of $112 may seem high, but it is nowhere near as high as it has been in recent years. At the beginning of 2008, a barrel of crude broke through what was then considered the psychologically important $100 (€74) barrier for the first time. The news made headlines around the world and had analysts predicting an extended era of high oil prices.

For months oil experts were on the money, and prices went through the roof. In July 2008 a barrel of oil cost $147 (€110) and some were predicting that the $200 barrel was not far away.

Then Lehman Brothers collapsed, the financial crisis gripped the US and Europe and the resulting recession in some of the biggest oil-consuming countries in the world saw demand tank and prices go into reverse. In October 2008 the cost of a barrel of crude had fallen to just over $73 (€54).

Although crude-oil prices are now much lower than they were in July 2008, the cost of fuel in Ireland is much higher and the cost of keeping a car moving appears to be climbing. The average price of a litre of petrol is now about €1.55, according to the price-tracking website pumps.ie. Diesel, meanwhile, has an average price of just one cent less. In July 2008, when oil prices peaked, a litre of petrol here cost €1.36, which is 19 cent less than it costs today.

Pumps.iecarries analysis of fuel prices in Ireland and its most recent assessment says that although this has been "one of the most stable periods for oil prices for many years", petrol-pump prices have climbed by up to 12 cent in the past eight weeks.

So, to repeat the question: what is going on? Many people blame petrol companies and accuse them of making easy money on the back of price hikes. That is not the case. The only major study into fuel prices in Ireland, carried out by the National Consumer Agency more than three years ago, found that Irish petrol companies do not artificially inflate prices. Meanwhile, figures from the AA show that forecourt fuel prices track internationally pricing pretty faithfully.

“There are a few things going on, some of which are easy to explain and others which are more mysterious,” says the AA’s Conor Faughnan. He returns to what he calls his “hobby horse” when he says that the biggest culprit is the taxman.

“Since the emergency budget in late 2008 there have been five separate tax increases, including increases in VAT, the introduction of carbon tax and three excise duty hikes,” he says. “Combined, these have added 21 cent to the price of a litre of fuel. Had successive governments not done this, we would be looking at a per-litre price today of €1.34.”

Analysis on pumps.iealso suggests that the taxman is to blame for a large proportion of the price rises. "Before blaming the hard-pressed forecourt owners, who take an average of just five cent of the €1.55 average we are currently paying, let's see what has happened since October," the website states. "Budget changes added 1.4 cent to petrol and 1.6 cent to diesel in carbon tax on December 6th; it also added 2 two per cent VAT on January 1st."

Another key element in rising prices is the falling euro. Last summer the euro was trading at about $1.43; today it is worth about $1.27. As oil is traded in dollars, this has added several cent to the price of a litre of fuel.

So far, so simple. But, according to Faughnan, a third element is more of a mystery. “There has been a dramatic increase in the wholesale prices of the manufactured product in Europe and prices here have become anomalously expensive in recent weeks,” he says.

He says that all price projections for fuel are down. With the euro economies in a slump, demand is expected to be sluggish, so, logically, prices should be falling across Europe. But they are not. He suggests that this can be explained partly by the closure, since last autumn, of three Swiss-owned refineries that manufacture the higher grade of fuel sold in the EU.

“It may also have something to do with how big money is moving, with hedge funds running scared of equities and currencies, and buying commodities instead,” Faughnan says.

Whatever the cause, Irish consumers are paying. In the past, motorists were remarkably impervious to price rises and demand remained strong. But things have changed, according to Faughnan, and there has been a drop in fuel consumption of more than 10 per cent since 2009.

“Our data shows that in the face of rising prices, 45 per cent of motorists say they will reduce their mileage,” Faughnan says. “Obviously they cannot cut essential journeys, so what is being hit are lifestyle and leisure trips.”

The bad news is that things are likely to get worse. While long-term oil prices have made fools of many self-styled experts in recent years, the short term is easier to predict. Faughnan says that prices will probably be higher in a month’s time than they are now.

It is worth bearing in mind that Irish drivers are still comparatively well-off compared with those elsewhere in Europe. Last week, when petrol cost an average €1.54 a litre in the Republic, drivers in France were being asked for €1.62 and those in Greece and Denmark were paying €1.72. In Britain, motorists were paying the equivalent of an extra 10 cent per litre. And the poor old Norwegians, despite have all that oil in the North Sea, were paying the highest price in Europe at €1.92 a litre.

More left in the tank :Five ways to spend less on petrol

Choose your garage wisely.Fuel prices can fluctuate by more than 10 per cent from garage to garage. Check out pumps.iefor prices or, better still, download the pumps.ieapp, which points you in the direction of the cheapest garage in the vicinity.

Become price aware.Get out of the habit of simply throwing €20 worth of fuel into your car's tank as and when you need it. Instead, buy a set number of litres each time you visit the forecourt. Buying 40 litres of fuel, instead of €40 worth, means you quickly become aware of the price gaps between different garages.

Accelerate and brake less. By driving at a steady 80kph instead of changing speed frequently, you will burn about 25 per cent less petrol.

Empty your boot and take the roof rack off the car.The heavier the car, the harder it has to work and the more fuel it needs. Roof racks ruin the delicate aerodynamics of cars and increase fuel bills.

Clean air filters and make sure that tyres are at the right pressure.If filters get clogged, they restrict air flow to the engine, so fuel consumption is increased.

Cycle or walk.Don't hop in the car at every available opportunity – its costing you money as well as polluting the planet.