What's pumping up the price of petrol?

PETROL PRICES:Prices at the pumps are at near 2008 highs so what's going on?

IF PETROL prices were a roller coaster ride we’d be experiencing that sickening lurch which comes with a steep ascent right now. The cost of keeping our cars on the road has climbed dramatically since the beginning of the year and a litre of petrol is now just a couple of cent off the record highs it reached in the summer of 2008 when a frenzy of speculation shot the cost of a barrel of crude oil through the roof of the international markets.

A litre of petrol now costs more than 30 per cent more than it did at the lowest point in the current fuel cycle and the average price of a litre was €1.33 in the middle of last week while the average cost of a litre of diesel is €1.22, according to the price comparison website pumps.ie.

The higher prices are unquestionably hitting people hard. Today motorists are paying around €15 more to fill a 60-litre tank than they did this time last year. If this is sustained for the next 12 months – and there is no reason to believe it won’t be – motorists will end up spending an average of €600 more this year than they did last.

But what is driving the higher costs? The traditional answer is oil prices but not this time. In the middle of last week a barrel of oil was around $82 on the international markets, a long way off the record highs of $148 which we saw two years ago when speculation was so wild that barrels of oil were changing hands more than 20 times on the international commodity markets – at least nominally – before being brought to the actual market. When oil reached those dizzying highs, the price of a litre of petrol in Ireland was €1.36 or three cent more than it costs today.

Could it be that the petrol companies are looking to give themselves a bigger slice of the petrol pie? Not at all, says chief executive of Maxol Tom Noonan. He rejects suggestions that the petrol companies are making more money from the higher prices. “There is absolutely no room for padding our margins and the fact of the matter is we are making less money now.”

He points out that the National Consumer Agency (NCA) “effectively gave us a clean bill of health when it carried out an investigation of the sector”. He is right on that score – the agency carried out extensive work on petrol pricing towards the end of 2008 and concluded that Irish petrol companies were not artificially inflating the prices at the pump.

The AA’s Conor Faughnan says “people are struggling to understand why prices are so high now, particularly because the price of oil on the international markets is nowhere near what it was in the summer of 2008”. He says there are legitimate reasons “and one spectacular own goal which was scored by the Government”.

First the legitimate reasons: the euro has weakened significantly against the dollar, the currency in which oil is bought and sold. This means prices in Europe have climbed. As the hedge funds which were levelled by the financial meltdown of 2008 and 2009 start coming back into the game, speculation is on the rise and booming demand in China has also put upward pressure on prices.

What clearly angers Faughnan – and to a lesser extent Noonan – are not changes on the international markets but events closer to home. There have been four fuel tax increases over the last 18 months, including excise increases of 12 cent and a carbon tax of slightly more than 4 cent. Although to call it a carbon tax is “a complete misnomer – it was just another tax”, Faughnan says.

The tax increases have hit Irish consumers hard and will also have a negative effect on the taxman, he adds. For every €20 that a motorist puts in their tank, the Government takes €14.

The effect of the tax hikes has been to dramatically reduce the gap in prices between Northern Ireland and the Republic where fuel has long been cheaper. Northern drivers who had grown accustomed to crossing the Border to fill up now have less reason to do so which will result in a smaller tax take on fuel in Border counties.

While Faughnan is sure the Government has messed up, he is less certain about the prognosis for the year ahead. “If I could predict the long term future of oil prices, I would now be on a beach somewhere drinking a pina colada. We can say with a fair degree of accuracy what is going to happen in the month ahead and there is no real prospect of price reductions, and we can predict volatility in the months ahead.”

In the very long term Irish drivers may be offered some relief from high petrol and diesel prices in the form of the electric car. Last week an initiative was rolled out to move it front and centre in an effort to wean us off our addiction to oil. And we are seriously addicted to it. We consume 50 per cent more per capita than the UK and, if we had a population of 100 million, we would be consuming more oil than China.

Under a new scheme announced by the Minister for Communications, Energy and Natural Resources Eamon Ryan last week, motorists who buy electric cars will be entitled to a grant of up to €5,000 in order to make the first commercially available electric cars competitively priced in comparison with their petrol or diesel equivalent.

The ESB has also said it will provide 3,500 charging points by the end of next year which should be a boost to Government plans to have 10 per cent of Irish cars powered by electricity by 2020. If the electric dreams actually come true – and it is a big if – then consumers would stand to save massive amounts: it costs 80 per cent less to keep an electric car motoring compared to a petrol or diesel one.

Neither Faughnan or Noonan believe the Government targets will be reached although Faughnan is undoubtedly the more enthusiastic of the two, unsurprisingly, as his business is not threatened by the electric switch in the same way the petrol business is.

Noonan is somewhat sceptical about the Government’s plans. “We were the ones who pushed biofuels very strongly and the Green Party were mad keen on them. Then they had a change of heart so I hope their commitment to the electric car proves to be a bit stronger,” he says.