The invasion of Ukraine has already overturned turbulent energy markets, and diesel has now reached a record 180 pence per liter – 36% more than in January 2020, before the pandemic. EU diplomats are seeking an agreement on the phasing out of Russian oil this month, threatening further disruptions that could lead to even higher diesel and petrol prices. But against that background, oil prices actually fell from their highs in March in the first weeks of the war. Therefore, these drops are not fed through the pumps.
Why does diesel jump in price?
“There are different factors in the game,” said Shore Capital analyst Craig Howie. “There was an increase in truck transport activities, stretching demand; concerns about exports to Europe from Russia, shutdowns in the United States and lower refineries in China. In terms of oil, China is a problem. Strict traffic restrictions have affected demand, but the blockade has also reduced some refining capacity. “
The U.S. Energy Information Administration estimates that stocks of U.S. distillates – usually diesel and gasoline – fell 8 percent in March to 24 percent below the five-year average. Refining oil for petrol has historically been more valuable to refineries, but Russia has been a major exporter of diesel, which means that demand for diesel refining elsewhere has increased the price of refineries in other countries.
Are there enough oil refineries?
Western oil refineries have been experiencing difficulties in recent years. The drop in oil prices due to Covid has hurt the industry, which is struggling to attract investment in facilities amid heightened environmental regulation and concerns about peak oil demand. Many of the refineries supplying Europe are based in Russia, while Beijing closely controls how many Chinese refineries export.
There are six large refineries in the United Kingdom. There were concerns about the finances of Essar Oil, the company behind the Stanlow refinery, as unions called for a meeting with Scottish Prime Minister Nicholas Sturgeon amid uncertainty about Grangemouth’s future. In theory, the boom in refining demand should have helped them, although the rise in oil prices in March will inflate their investment costs.
So why are crude oil prices falling?
Oil prices remain high compared to a year ago, when the Covid blockade around the world affected fuel demand. But oil is well below the 10-year high of $ 119 a barrel seen in March, when Russia’s invasion of Ukraine shook markets. The International Energy Agency then warned that Western sanctions against Russia would remove 3 million barrels a day from the global oil market. Now the agency said growing production from other oil-producing economies and slowing demand growth could ease the situation.
Aren’t prices moving in tandem?
They usually do. The indicator of oil, followed by investors and analysts, is West Texas Intermediate (WTI), crude oil used by refineries. Once the oil is refined, it is used in products such as diesel and gasoline. The prices of both WTI and refined products are usually moving in step, but in recent months they have diverged. Crude oil is hovering around $ 110 a barrel, and wholesale prices for refined products would normally be only a few dollars higher, but jet fuel rose to as much as $ 275 a barrel, according to Bloomberg. Diesel is about $ 175 per barrel and gasoline is $ 155.
Refining margins are calculated using crack spreads – the total difference in price between a barrel of crude oil and refined petroleum products. Spreads have been extremely strong recently – the average crude oil spread in the United States is the highest since 1988.
Do fuel traders make a profit?
The RAC accused retailers of earning 2 pence more per liter than before the chancellor announced a 5 pence reduction in fuel tariffs in a spring statement in March. The body claims that supermarkets and other petrol retailers could make £ 7m a month as additional profits. Industry sources argue that the cuts have been made, but the increase in refining and logistics costs has since put pressure on them. “Our prices are on huge signs in front of the front yard, so this is a very competitive industry. Retailers have always struggled to keep prices low, “said one retailer. A spokesman for Boris Johnson said Asda, Tesco and Sainsbury’s had agreed to reduce fuel tariffs and that Quasi Quarteng, the business secretary, would write to the industry “to make sure everyone is passing on these cuts to the front yard”.
What can the government do?
Conservative MP Robert Halfon has called for a “pump regulator” to monitor prices, while Liberal Democrat leader Sir Ed Davey has called on Boris Johnson to pull down gasoline dealers on Downing Street to explain why the reduction in fuel tariffs has not been passed on. .
RAC claims that Sunak should reduce VAT to 15% from 20%. “Drivers still pay 27 pence VAT on petrol and 29 pence on diesel, which is exactly the same as before the spring statement,” said Simon Williams of the RAC.
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