While crude is often the most frequently used
barometer of petroleum product pricing and certainly the one most quoted by the
news media, the Commission utilizes actual refined product wholesale market
pricing in the determination of its pricing adjustments. Adding to the
confusion, crude pricing often tracks quite differently from refined product
pricing due to seasonal or other market factor determinants.
World crude prices and end product (pumps) price
for Petrol and Diesel
Referencing the price of gasoline to the last time crude was trading at
a certain dollar value a barrel, for example, is to a large degree meaningless
as so many other factors including tax rate differentials, changes in the U.S.
exchange rates, seasonal market demand variables and other relevant market
determinants would have to be taken into consideration in order to make
the comparison accurate. The relationship between crude and refined product
pricing does not always correspond intuitively.
Refined
products such as gasoline, furnace oil, stove oil and diesel are made from
the processing of crude oil. Crude oil is sourced from all over the world,
including the Middle East, Africa, the North Sea, Russia, South America as well
as the United States and Canada.
Price factors
There is an indirect
relationship. The price of fuel at the pumps is a subject that attracts
a lot of debate, particularly when prices rise.
But there are numerous elements
that make up the price of a litre of petrol or diesel, primarily:
The cost
of petrol and diesel on the open market - cost of product (the supply and demand for oil products);
Government
duty and tax;
The
costs and profit of the wholesaler and retailer;
Interruption
of supply as a result of geopolitical occurrences such as civil unrest or war;
Natural
disasters and weather patterns;
Speculative
actions on the part of money managers;
Seasonal
demands; and
The other factors affecting the price include
exchange rates, competition, commercial objectives of the filling station owner
or operator, as well as seasonal factors.
For an example, pump prices as
established by the Commission are based on changes in refined gasoline product
prices as traded on the New York Mercantile Exchange (NYMEX). While over time,
the trending of crude prices should correlate with refined product pricing, it
is not uncommon, in the short term, for crude prices to be heading in one
direction while refined product prices head in the other. Both are
internationally traded commodities and as such can be subject to different
market influences. Crude prices for instance may be falling due to global economic
conditions while refined gasoline prices may be rising due to local and
regional supply circumstances.
Retail / ex-refinery spread
The third element is represented by the cost and
profit of the wholesaler / retailer, often referred to as the retail / ex-refinery
spread. This covers:
Costs
of transport to a storage terminal / depot, storage, and distribution to a
filling station;
Marketing
and promotion costs; and
Costs of operating the filling station and
staff
The remaining spread has to provide a return to
the supplier of the fuel and the retailer operating the filling station. The
retail / ex-refinery spread is strongly influenced by market conditions. The
retail/ex-refinery spread is not the final profit that the retailer makes, it
is simply the difference between the cost of the wholesale price of fuel on the
open market and the selling price on the forecourt, from which, as mentioned, a
range of costs have to be deducted.
Of the approximately 4,500 major oil company
branded sites, more than half are owned by independent retailers. The retailer
usually has an exclusive supply contract with an oil company limited by law to
a maximum of 5 years’ duration.
The retailer purchases fuel from the supplying company and decides the
price to charge at the pump, based on a number of factors including wholesale
prices, and competitive conditions.
Speculation
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Photo : The Borneo Post
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The margins that oil companies make depend largely on the actual price of oil and the open market. the difference between the cost of oil and the price of it largely comes down to supply and demand, and speculation by investors. when supply is constrained, such as Libya ceasing production of its high quality oil earlier, the price is forced up.
Equally,
when demand falls away, for example during the recession that hit most
developed economies in 2008, the price falls. More importantly, it is the
expectation of future supply and demand that drives the price.
Finally
there is the impact of speculators, which is almost impossible to quantify, but
many organisations, the motoring group AA among them, believe investors play an
increasingly significant role in driving the oil price.
But
whether it's speculators, investors, governments or oil companies benefiting
from high costs of petrol and oil, one thing is certain - consumers invariably
end up losing out.
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