Oil companies are frequently blamed for reflecting oil price increase at pumps but are reluctant to cut pump prices when the oil price goes down. In France this subject is even more sensitive than in the UK with big pressure on the government to create special taxes for oil companies. Are we really paying too much at pumps? Does petrol price at the pump really reflect the oil price? I have decided to gather the relevant data and make up my own mind. The results are quite surprising.
First of all let's have a look at the Petrol and Diesel price in the UK (pence) and France (cents) vs. Oil price in US$. Don't be confused by the different Y-axis units, it doesn't mean that petrol is more expensive in France at this stage. In average Petrol and Diesel prices follow the trend given by the oil price. From mid 2007 petrol price seems to raise less than oil price, which is of course due to the weakness of the US$.
How has oil price risen in France and in the UK in their own currency? The following graph is quite interesting as it shows the oil price in US$, in € and in £ assuming the same starting point in 2006 (i.e. 1€ equals 1£ equals 1US$). This shows that for the last two years the oil price increase has not been the same for everyone. Americans were hit more than British people, who themselves were hit more than the French. For example in April 2008 French people were hit 23% less than Americans because the € was strong, similarly in Nov 2007 the difference was 15% between the UK and the US. The US$ has recently been stronger: this is reflected in the graph for the months of August and September. Although oil price has dropped, the effect was less visible in the UK because the Pound has been weaker compared to the US$.
For the purpose of this article we now need to compare the petrol price vs. oil price in the same currency. The enclosed graph on the RHS shows oil price in US$, in € and in GBP for the same period.
But are Petrol and Diesel prices reflecting the oil price? To answer this question I have created a simple ratio R. R is the price at pump in a country divided by the oil price in the currency of this country. The results are now very interesting.
I have assumed that no other parameters intervene massively in this ratio. In theory a refinery receives crude oil, processes it and distributes it. There is no particular reasons why the ratio shouldn't be more or less flat (few fluctuations might exist as refinery costs are flat and not linked to the oil price). Taxes variation might influence but this variation is still marginal compared to how much the ratio fluctuates (see later).
The ratio being flat means that when oil price goes up, price at pump reflects this. And vice versa. The higher the ratio, the more the customer pays at pump compared to what he/she should pay based exclusively on oil price fluctuation. If R increases, then the customer pays more than the oil price increase. If the ratio decreases, the customer pays actually less at pump compared to what he/she should pay. Of course the ratio doesn't mean anything by itself, only its variation or relative value is important.
Graph Above: Ratio R fluctuation over the last two years
The results are surprising. This ratio reached a peak in Jan 2007 in both France and the UK, with a particular peak for Diesel UK. It has then decreased severely until last month. In June 2008 it has reached its minimum, almost divided by 2 compared to Jan 2007. It clearly means that we are not overpaying the petrol at pump, or at least compared to what we paid in 2007.
In Feb 2007 Diesel price was 90.9p with a monthly average oil price of 52.6 USD. In June 2008 Diesel price was 131.6p for an oil price of 126.3 USD. During this period oil price has increased by 140% while diesel price has increased by only 45%. This is the strongest difference that appeared on this graph but it shows that it is rather difficult to blame oil companies for taking advantage of the situation today. However it seems fair to admit that they were abusive 18 months ago, largely overpricing the price at pump when the oil price was relatively low. At this time we were hearing a little bit about petrol price increase, but not as much as today.
Tax is a key role in determining the petrol price but it remained in the region of 55 to 65 % for diesel and 60 to 67 % for petrol in the UK during this period (small fluctuation wrt to the R ratio). Taxes do not explain the big fluctuation of Ratio R. Of course petrol price has an almost fixed element in it, the refinery cost. However this element is marginal given the large volumes treated and doesn't justify such a fluctuation in the R Ratio.
What about today?
I filled my car with petrol in the UK this morning and paid 99.9p/l. Oil price this morning was 72.8 USD, the currency exchange USD/GBP was 1.729 making the oil price at 42.1 GBP and R=2.37, which according to our graph is good but could be improved. If the ratio was 1.81 like in June 08 I would have paid 76p per liter. Oil price is very low for the moment and the response from the petrol stations is even lower. Oil companies suspect it will raise again soon, so they prefer to wait. However we can easily assume that today, even at 99.9p/l, petrol is too expensive.
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