What drives the cost of fuel up?

Exactly why are we feeling the pinch in our pockets at the petrol pumps?

Nowadays, everybody has seen the price of fuel shoot right up. Prices for this commodity have increased by around 32% in one year. 

AA Ireland stated in its latest car fuel price research for February 2022 that pump prices have hit their highest peak since the organisation began its surveys in 1991. 

The February survey found that the average retail price of petrol was €1.75 per liter, while diesel was €1.67 per liter. 

At the beginning of March, its price stood even higher, at around €2 per liter of petrol and €2.10 per liter of diesel. That was an increase of 31% per liter of petrol and 33% per liter of diesel in one year. 

Changes in worldwide oil and gas prices eventually lead to changes in the retail prices for gasoline, diesel, and natural gas. 

However, worldwide pricing is simply one component of the consumer’s cost. Government taxes and distribution fees are also important components. 

Reasearch done by Ireland2050 has shown that major changes in the international prices of oil and gas are not reflected to the same extent in the retail price.

During the first quarter of 2016 when the price of oil was low, the oil component of the cost of petrol accounted for only about 10% of the price we paid at the pumps.  

Most of our gasoline prices (about 70%) are collected by the government in the form of excise taxes, VAT, and taxes including various levy combinations. The remaining 30% is the cost of refining, distribution, wholesale, and retail margins. 

For gas, the tax burden is lower (about 15%), but the cost of gas itself is still only about 45% of the retail price. Gas transmission and distribution accounts for about 40% of the price. 

Petrol Pumps, Image / Eric Mclean

The sources 

One of the reasons why fuel prices are rising is because of supply and demand. Light/sweet crude is simply becoming scarcer and harder to obtain.  

If the supply of this priority oil is restricted, the price will rise. On the other hand, heavy/sour crude oil is widely used all over the world. Heavy/sour crude oil prices are low, sometimes significantly lower than light/sweet crude oils, offsetting high processing costs. 

As demand goes up, the supply goes down meaning that to alleviate the pressure on this scarce good, companies must raise the prices because it incentivizes people to use less of it. 

While customers might change their fuel utilisation by purchasing more eco-friendly vehicles, driving nearer to work, or taking public transportation, they can’t or will not do as such in light of a temporary climb in costs. 

“Fuel prices are volatile and the wholesale price paid by one service station on a given day may differ to the price paid by another service station on another day. This means that the day a service station takes delivery of fuel will impact the price charged to the customer.” 

Spokesperson for Maxol

The cost will adjust the inventory of gas with the interest for it. The worldwide idea of the market for gas guarantees that equilibrium. That leaves inflation and taxes to account for the biggest relative increases in the price of gasoline. 

You can find more information on what exactly supply and demand is, using this link.

Another source for the big increases at the fuel pumps is because of the recent Russian invasion of Ukraine. 

Since Russia is one of the world’s largest producers of oil and gas, disruptions in its production process will have a global impact. 

With Russia having launched a full-scale invasion of Ukraine and facing international sanctions, significant disruption to supplies have already occurred. Russia produces 4.5 million barrels of oil each day, and only Saudi Arabia produces more.  

The sanctions levied against Russia so far have targeted banks and oligarchs rather than the country’s energy sector, but factors such as Germany’s postponement of the Nord Stream 2 gas pipeline will influence the energy market overall.  

Russia also has the ability to reduce oil exports to Europe in a tit-for-tat response to economic sanctions, and experts suggest Saudi Arabian oil fields could struggle to increase production sufficiently to counter such measures. 

Another factor in these price hikes stems from the pandemic.  

Lockdowns and social restrictions over the last two years has forced many industries and events to grand to a halt and this has led to a decrease in demand for energy. And as demand fell, so did supply. 

Then, as restrictions began to ease, demand spiked. In particular, the hospitality and travel sectors enjoyed a recovery which contributed to the rapidly increasing demand for energy. 

But it is difficult to suddenly increase supply to meet a rise in demand, so prices slowly went up. 

The supply side of the gas market has become increasingly complex in recent years. This is partly due to international political factors, but also the drive to reduce reliance on fossil fuels and switch to more sustainable energy sources to meet climate change commitments. 

In a statement to The Liberty, a spokesperson for Maxol said that “fuel prices are volatile and the wholesale price paid by one service station on a given day may differ to the price paid by another service station on another day. This means that the day a service station takes delivery of fuel will impact the price charged to the customer.” 

“The volatility of the global market is having a knock-on effect at the pumps, and we are likely to see further price movements over the coming days and weeks until there is some stability and an easing of geo-political tensions.” 

Maxol petrol prices on Navan Road, Image / Elio Bonelli 

The possibility for a resolution 

The ongoing invasion of Ukraine by Russia is putting significant pressure at the petrol pumps while the uncertainty of how this is going to play out is also causing a lot of concern. 

We are also still in a pandemic and as other countries come out of restrictions, we will start to see more demand for fuel. 

However, here, the Government is reducing the excise duty on fuel. On Wednesday 9 March, the Dáil voted in favour of a cut of 15c in excise for diesel, 20c for petrol and 2c for green diesel. 

The changes took effect at midnight that night and will be in place until the end of August. 

The Department of Finance is considering the introduction of a “swing mechanism” under which the rate of excise on fuel would be reduced if further increases in prices are incurred because of Russia’s invasion of Ukraine. 

Green Party leader Eamon Ryan made a submission to Finance Minister Paschal Donohoe asking him to examine if a financial mechanism could be developed to link excise on fuel with the price of petrol and diesel. 

In a statement to the media and in response to claims that Circle K was raising prices to counteract the cuts, the company said, “we categorically refute claims that price changes across petrol and diesel were implemented as a result of today’s Government announcement regarding the reduction in excise duty.

“Our pricing is set in line with local and international market movements and wholesale market costs. 

“This was the case today and the same process is adhered to anytime there are price changes.” 

Circle K Ireland described the current period as “unprecedented”, stating that the invasion of Ukraine is leading to price pressures that are “a challenge for all fuel retailers”. 

Meanwhile, Bus Éireann has said that in 2021, it “introduced its first zero and low emission buses to its fleet, and this year will see Athlone move to an all-electric town fleet. No new diesel buses will be added to urban services, reducing our reliance on fossil fuels and cutting our greenhouse gas emissions by half by 2030.”

In regards to the dramatic hikes in fuel prices, Bus Éireann said it “is part of the CIÉ Group. The three CIÉ operating companies (Bus Éireann, Dublin Bus and Irish Rail) are fully hedged for 18 months in advance, bringing us to Quarter three of 2023.  The Group hedges on the forecast consumption of diesel.

“This means the recent dramatic increases in fuel costs have not significantly impacted our cost base at this time.” 

For more updates, you can visit their website here or their Twitter page.