Crude oil prices have plummeted. Why not prices at the pump?

A man called John contacted us to see if we could “challenge the consumer rip-off at the pumps”.

Clearly annoyed, he pointed out that crude oil wholesale prices had declined dramatically in recent days as a result of the spread of coronavirus and a dispute between Saudi Arabia and Russia. The price of a barrel of oil had fallen over 30 per cent from $68 to $45 while the euro had strengthened versus the US dollar. “Yet the price of diesel per litre at pumps fell maybe 3c or 4c. The only logical conclusion is that the consumer is being ripped off.”

In fact, by the time we got to read his email, the price of a barrel of Brent Crude was closer to $34 a barrel and oil prices had fallen on a scale not seen in a generation. But despite precipitous declines on international markets, price falls on our forecourts seemed negligible.

This is not the first time wholesale prices and the price we pay at our local garage have been out of whack, and it is hardly surprising that when it happens many people blame petrol companies and accuse them of making easy money.

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That is not the actually the case – or at least the only reliable evidence we have would suggest it is not the case. The only major study into fuel prices in Ireland was carried out by what was then known as the National Consumer Agency almost a decade ago.

It found that Irish petrol companies did not artificially inflate prices. Figures from other sources, including the AA, have also routinely shown that forecourt fuel prices in Ireland do track international pricing pretty faithfully.

Tax factor

So why does it seem like we are being ripped off? There are several reasons for that but the main one is tax. Most of what we pay at the pump is made up of various taxes placed on petrol and diesel. In fact, if a litre of fuel costs €1.40, about 90 cent of it goes straight to the taxman. That means about 50 cent has to be divvied up between the people who get the oil out of the ground, those who refine it and those who ship it to Ireland as well as those who actually sell it to drivers here. According to multiple sources, retailers here make about 5 cent on each litre of fuel sold.

Another factor is timing. If a garage buys its stock of petrol and diesel and pays a certain price, it has no real option but to sell it to drivers at a certain price, irrespective of what happens on global markets.

Having said that, with the price of crude oil now at one of the lowest levels in a generation, the prices on forecourts will have to fall and fall quickly. In the past, when crude prices have been hovering at $30-$40 dollars a barrel, the price of a litre of fuel to consumers should be about €1.20 or so. And that is the price you should be expecting to see in the days and weeks ahead.