Irish petrol prices under downward pressure

Spending on energy accounts for over 10% of the average Irish household budget and the volatility of energy costs is often a significant factor in the swings evident in the  overall inflation rate. The past year has seen a much more stable picture,  however, and in September energy prices were 1.7% below the same month in 2013.  Spending on petrol  and diesel accounts for over half the total energy spend and prices there have also fallen , by some 4% over the past year. The price of petrol at the pump has also eased over the past few months and currently averages around €1.50 a litre, from  €1.57 in July. Further falls are likely in the near term  in the absence of a significant fall in the euro, to perhaps  around €1.47,  given the events unfolding in the oil and gasoline markets.

Tax accounts for around 55% of Irish petrol prices but the recent Budget left fuel alone, following a series of tax increases since 2009, amounting to over 20 cent per litre. Apart from the Exchequer, the price of petrol is largely determined by three factors; the price of crude oil, the value of the euro against the dollar and refinery margins. The global demand for crude is rising but at a slower pace than most expected  -the International Energy Agency has just revised down its forecast for this year and next-reflecting sluggish world growth and a steady decline in the amount of oil required to produce a given unit of output;oil provided 46% of world energy needs in 1973 but only 31% today..The biggest recent  change in the global oil market has come from the supply side, however, with a large increase in non-OPEC production; in the past year non-OPEC supply has increased by over 2 million barrels per day  and in the near term increased production from that source is expected to more than offset any likely increase in overall  global demand. A big factor in that change is the increase in output from the US (in part reflecting the impact of oil from Shale sands) with production there currently challenging Saudi Arabia for the title of largest world producer.

The price of Brent Blend, the European crude benchmark, has fallen by 22% over the past three months, to around $85 a barrel in the face of these demand and supply changes. The euro has also fallen against the dollar over the same period but the decline there has been much  less pronounced, at around 7%, so in euro terms crude oil is now some 15% cheaper than it was in mid-July. In the medium term the price of crude will determine the price of refined products, including petrol, but in the shorter term the margin that a refinery can make  by ‘Cracking’ the barrel of crude (the ‘Crack spread’) can vary, depending on local demand conditions and the degree of excess capacity in the industry. Crack spreads in Europe have been higher in recent months than they were a year ago  but the wholesale price of gasoline has fallen sharply of late and now broadly reflects that of the fall in crude.

A 15% fall in the wholesale price of petrol  over recent months would therefore imply a 7% fall in prices at the pump from the mid July level  (given  over half the price is tax) which would leave average prices around €1.47 a litre. Price will vary around this, of, course, given local supply and demand conditions but most areas should see some price declines, although the demand for petrol is now rising again nationally, which may also influence retail margins. The main risk to that outcome relates to the euro, which has regained some ground of late but still looks vulnerable given the economic backdrop .

 

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Published by

Dan McLaughlin

Economics Lecturer and Commentator