Oil Price Vs Petrol Price

Why oil price movements are very different to petrol price movements

OPEC: Not so happy when oil prices fallThe alarm bells started ringing for Abdalla Salem El-Badri in about August 2008. Oil prices had started freefalling by then. The OPEC Secretary General hastily convened crisis meetings in September and October, during which the cartel – which controls 40 per cent of global crude oil – agreed to slash production by a total of two million barrels per day. That’s about 318 million litres daily – a box 100 metres by 100 metres at the base, stretching 32 metres into the air.

It was the eve of the global financial crisis. With the US and other notable economies casting about for the Last Rites, demand for petroleum products had fizzled. Economies run on petrol, basically. A barrel of crude hit its stride just before that, in July, at $US147. Now the bubble had burst. El-Badri and his OPEC mates sought to prop up the oil price above $US50 by constraining supply.

It didn’t work.

Oil went on to hit its lowest price since February 2005 –
below the $US45 per barrel mark. That’s a massive 70
per cent fall in just five months.

Meanwhile, Down Under, according to the Australian Institute of Petroleum, the national average price of unleaded petrol peaked in line with crude prices on around July 10, 2008, at $1.68 per litre. By November 30 that had fallen to $1.08 per litre, with pundits predicting sub-$1.00 per litre pricing by Christmas. The price fall is 35-odd per cent.

Crude being 70 per cent off the pace and local prices dropping by only half that inspired petrol-price conspiracy theorists onto their rev limiters with a new take on ‘oil companies ripping us off’.

They’re all wrong.

For starters, there’s currency movement. The Oz dollar (AUD) closed at a 25-year high against the Greenback on June 30, enjoying near price-parity with the US dollar (USD). As the financial year bowed out, one AUD had the power to buy $US0.9643 (ninety-six-and-a-bit US cents). Fast-forward to December 5 2008 and that buying power had dropped to $US0.65 (sixty-five US cents).

The drop in the dollar is equal parts global economic atrophy and plunging commodity prices stemming from economic cardiac arrest – the AUD (world’s sixth most-traded currency) is closely linked to commodities like coal, copper, steel, bauxite, etc.

This stuff can make your head hurt, but it works thus. Back when crude was $US147 a barrel, it would’ve cost $153 to buy one in AUD. With oil at $45 a barrel but the AUD weaker at $US0.65, in AUD we’d pay $69.23 a barrel. So if you’re buying in AUD, the fall in crude price has been broadly 55 per cent. Currency movements have eroded 15 per cent of the 70 per cent fall noted above.

Petrol’s come back 35 per cent; oil’s come back 55 per cent. Are we being ripped off?

Probably not. If you look at petrol around the $1.10 per litre mark, for example, which was average at the time of those currency movements, there significant fixed costs. One of the biggest is taxation. There’s a flat 38-cent fuel excise and 10 cents worth of GST – 48 cents in total, or about 44 per cent of the total price of every litre. The 38-cent excise is flat, and although the GST is proportional to the price, that proportionality reflects all the other fixed costs involved in turning crude into petrol.

Shipping adds about 3c a litre to petrol priceWith average bowser prices at about $1.10 per litre for unleaded, working back up the supply chain, the Singapore benchmark price for refined MOPS95 petrol – the right index for Oz, and where petrol really begins its trip to your bowser – kicks the tin at about 45 cents per litre. Shipping it here adds about 3 cents a litre.

Getting it off the ship, into a terminal and ready to tip into a tanker for retail distribution adds about 7 cents per litre. It’s convenient to think that this is all wholesale oil company profiteering but the fact is that it’s only partly profit. The terminals and wharves cost money to run (salaries, admin, utilities, etc.), there’s insurance on the product, wholesale marketing activities, and the taxes on wholesaling, too. It’s not a charity, obviously. They are making dough out of it – just not 7 cents a litre. Probably about 3 cents.

There’s about another 7-cent margin in the retail end of the business. That’s not all profit either. You have to deduct the cost of transport (terminal to servo), the admin and retail marketing costs (all those point-of-sale pamphlets, billboards and television commercials…) and the service station operating costs including rent, maintenance, utilities and the salary of the bloke paid to ask you if you are tempted by the two-for-one Kit Kat special – which is probably more profitable than selling the fuel.

Biggest profiteer out of the oil business: Governments, via taxationBottom line: at least half of the price of petrol is tied up in fairly fixed costs – peg it at about 56 cents per litre. And when you take those 56 cents out of the record high ($1.68) you get $1.12 worth of more or less variable costs – the ones that vary with the price of crude. Today’s variable cost per litre of 54 cents ($1.10 minus the 56-cent fixed costs) represents a drop of about 52 per cent in the variable part of the equation – the bit related to movements in the price of crude.

Given the estimates here, that’s so close to the currency-adjusted fall in crude prices that it’s be safe to shelve the oil company conspiracy theories – permanently.