Pumping up the prices

What's the story with petrol prices not coming down, asks Conor Pope?

It's always amusing, if a little alarming, when experts get things spectacularly wrong. At the beginning of this year, when a barrel of crude oil broke through the psychologically important $100 (€74) barrier on international markets for the first time, analysts confidently predicted a lasting era of apocalyptically high oil prices.

For months, it seemed as if they were spot on. Prices kept climbing, reaching a high of $147 (€110) in July. Irish consumers felt the pain almost immediately, with the price of petrol, diesel, home heating oil and electricity climbing dramatically and depressingly.

Then, almost overnight, things changed. A new apocalypse, in the form of the global banking system's near collapse, appeared on the horizon and as oil prices fell the story fell off the news pages .

At the time of writing, the cost of a barrel of crude oil had fallen back just over $73 (€54) - $75 (€56) less than its peak price 12 weeks ago. The International Energy Agency (IEA) is now predicting that global oil demand will grow at its lowest rate in 15 years while one of the few investment banks still standing, Goldman Sachs, has revised its year-end forecast for crude to $70 (€52) from $115 (€86). The forecast for 2009 has been similarly pared back to $86 (€64).

The collapse in the price of oil should be good news for consumers and should at least go some way towards offsetting the 8 cent per litre of petrol tax hike announced in last week's budget.

It should, but probably won't: although the price of oil has nearly halved in recent months, pump prices have fallen by only 6 per cent, which has led to accusations of profiteering against the sector.

The charge that savings are not being passed on to consumers on a timely basis are stoutly rejected by suppliers who insist it is the cost of the refined product, not crude oil, that determines prices in garage forecourts. The dollar-euro exchange rate and supply and demand issues and overheads also impact on the prices, they say.

In January, as oil broke through the $100 a barrel mark, the average price of a litre of petrol was €1.19, according to the AA, which carefully tracks the price at the pumps in Ireland. A month later, petrol had fallen two cents a litre. In March, the average price of a litre of unleaded was €1.20. There was virtually no change in April but by June the average price had jumped another 10 cent to €1.30. July saw a further climb of 3 cent before falling back six cent to €1.27 last month.

So while a barrel of oil costs around 50 per cent less than it did when it was at its peak in July the difference between the price of a litre of petrol on the forecourt then and now is less than 10 per cent.

It is not hard to see why many consumers believe they are being ripped of by petrol retailers but the figures don't tell the full story, particularly when you consider that a barrel of oil is bought and sold in the region of 20 times before it arrives on our forecourts.

Conor Faughnan of the AA is currently carrying out a comparison of the euro price of a barrel of oil and the price on the forecourts and his early findings suggest a broad correlation. "If I was hoping for a smoking gun when I began the exercise, I have so far been disappointed," he says. "Even if there is this correlation as an overall average, it remains true that there are individual cases of garages passing on price rises immediately in response to headlines, without a valid reason from the market," he says.

"Of course, the rises and falls in the price of crude oil are a factor on the price of the end product, but the link is not as direct as is often portrayed," Tom Noonan, chief executive of Maxol, told the Oireachtas energy committee earlier this month.

Danny Murray, the chief executive of Topaz, was singing from the same hymn sheet, and while he acknowledged that crude prices had fallen 24 per cent between June and September, he said the dollar had strengthened against the euro over the same period and claimed the real reduction was 14 per cent. "When the 14 per cent reduction in refinery prices is applied to Irish pump prices it equates to a reduction of just 5.6 per cent because government taxes make up such a large fixed portion of the overall price."

Petrol station owners for their part insist that the margin on petrol is very small - in the region of 3 per cent - which means most have to make the bulk of their revenue from the shops attached to the petrol stations.

Approximately 55 per cent of the price of a litre of petrol is government taxes, with another 20 per cent being accounted for by manufacturing and distribution costs and retailer overheads. This leaves just 25 per cent of the price of a litre of petrol being directly affected by the price of oil on international markets.

Another concern for consumers is the different speeds at which price increases and decreases are applied. Faughnan tells a tale of the Irish garage owner who, upon hearing about a significant spike in the price of oil on the world markets earlier this year, immediately sent a staff member out to change the prices on the forecourt signs to reflect that increase.

He says the lead-in time for a rise or fall in the price of petrol should be around four weeks. "The simple question that people want answered is, does petrol go up faster than it goes down? I don't see that happening on a systemic basis although there is no doubt that individual garages are applying opportunistic price rises and are very slow to reduce prices. We do have a concern that the market is not treating us fairly.

"The traditional advice is to shop around but this is no longer good enough in our view. Before the international financial crisis the biggest problem we faced was from high energy costs. It is a disappointment that, just when some relief is coming on that front from world markets, more cost has been added in the form of tax."

Faughnan says the eight cent tax rise must come with a promise that the government will ensure that market price reductions will be passed on. "They can't just sit there taking money. They have a responsibility to motorists to make sure our open market is properly watched and regulated. We want to see far greater government scrutiny of the oil industry to make sure that the consumer is not being ripped off at a time of volatile international prices."