Realist, not conformist analysis of the latest financial, business and political news

Err, Yes, Suppose So Really, Petrol Prices Lagging Crude Oil

Petrol companies have doubled the amount of profit they make per litre of petrol by refusing to pass on to consumers the significant drop in the price of oil.

The prices of Brent Crude oil, the grade most commonly used in Britain, and West Texas Intermediate (WTI), the American standard, have fallen more than 70pc since the start of the year.

A lack of demand due to coronavirus, which has grounded planes and halted manufacturing, has been exacerbated by oil-producing countries refusing to reduce the supply.

Last week, future sales of WTI fell into negative territory for the first time ever, dropping as low as -$37.63 per barrel before recovering. Yet these unprecedented prices have not made it to petrol forecourts….

It takes a month or three for crude to make it from the pipeline delivery point through the refinery and out to forecourts.

One of the things that is causing this drop in price at the pipeline end being that we consumers aren’t sucking it out of the forecourt like we normally do. So, what is in the forecourt will have been bought, largely enough, at those old and higher prices.

Sure, the major oil companies all value their oil at today’s purchase price. This is why when there’s a price drop they all make staggering, horrendous, losses, as they revalue work in progress at today’s purchase price. This is also why they make gargantuan profits in a rising oil market. There’s not all that much reason why they should do it this way, rather than taking average, or historic or some other valuation measure. But it is the way they do it.

But petrol stations themselves don’t. Or often don’t perhaps. What’s in the tanks of the station today has been charged at price on delivery date by the oil majors. And until those tanks are refilled – exactly what isn’t happening in this time of cratered demand – then the stations themselves aren’t going to reprice.

Well, of course, some of them will, competition does that sorta thing. But now, right now, the petrol price being more than a little unlinked from the crude price, yes, this is what we’d expect. For the very same reason that the crude price has cratered.

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Leo Savantt
Leo Savantt
4 years ago

According to the RAC over 70% of the cost of a litre of petrol at the forecourt is direct tax. Of the remaining >30% some part of that cost is no doubt also tax (business rates, NI, corporation tax etc.). Just saying.

4 years ago

This is a whiff of the old canard that those bastard filling-station dealers (and up the line) are quick to raise prices and slow to lower them.

In fact, when product prices are rising, there is uncertainty, so dealers protect themselves by raising prices. When product prices are falling, there is also uncertainty and the same need to protect themselves. When the next tanker delivery comes, there must be money to pay him the price then in effect! But when prices are stable, dealers drop prices manically to try to pick up market share.

4 years ago

Petrol stations don’t make their money from petrol, the coffee, the basic groceries, the flowers, etc are where the profit is to be made. If no one is travelling much then those sales are down too. Fewer sales to cover the fixed costs.

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