If oil prices go down, why don’t fuel prices follow?

Russia invades Ukraine, and crude oil prices shoot up. Prices at the pump follow promptly. As the initial panic settles, oil goes down in price – but not fuel. If that’s true, are you being had?

The fog of war extends beyond the battlefield. In the absence of clarity, rumours start to circulate. As prices for petrol and diesel soar to ever greater heights, fingers are pointed. At energy providers, for price gouging. And at governments, for using the crisis to push even harder for electrification. 

Are we in conspiracy country? Or is there any truth to these allegations? Let’s line up the facts. 

Price of oil

First, the price of oil. One of the global benchmarks here is the price for a barrel of Brent Crude – oil produced in the North Sea. 

• On 27 April 2020, Brent Crude hit a twenty-year low, trading at just under $20. 
• Since then, the price has been steadily creeping up. At the start of this year, it was around $78.50, an almost four-fold increase.
• On 25 February, the last day before the impact of the war was felt on the market, the price was $94.12, up 20% over the start of the year.
• After that, the price shot up. On 8 March, just seven trading days later, the price for Brent Crude peaked at $127.98.
• After that peak, the price dipped, to $98.02 on 16 March. And rose again, to close last Friday, 25 March at $119.60. 

So, oil prices did fall after an initial peak, in fact almost back to the ‘pre-war’ level. But they have since increased again. The price last Friday was 27% higher than the last pre-conflict price, exactly one month earlier. 

Price of petrol

Petrol prices vary greatly across Europe, due to each country’s varying addition of taxes to the base price. If we take Germany – Europe’s largest market and one of the most reliant on Russian supplies – as an example, we see:

• On 27 April 2020, the average price for a litre of E10 petrol at a German fuel station was €1.176, a multi-year low in line with the historically low crude oil price.
• On 2 January 2022, the average price was €1.762, just short of a 50% increase. Hefty, but not as dramatic as the increase of the crude oil price.
• On 25 February, the price was €1.847, up 5% over the start of the year. 
• Germany’s average price for a litre of E10 petrol peaks on 13 March, at €2.275. 
• After plateauing for about a week, the price has come down to €2.137 on 27 March. That’s just under 16% up from the last ‘pre-war’ price. 

We see that petrol prices do shadow oil prices, but that the price increases seem to be smaller for petrol than for oil. One difference, and it may be crucial enough to explain the grumblings of price-gouging and EV-pushing: where oil prices peak, petrol prices plateau. In other words, the highest petrol prices are maintained for a longer period than the oil prices.

Peak vs. plateau

So, which mechanisms govern the setting of fuel prices? 

Firstly, a general principle. These are uncertain times. For wholesale buyers of petroleum products, that means: they don’t know whether there will be enough product available on the market in the next few weeks, or even days. So they stock up even if the price is high. That explains why fuel prices plateau, while oil prices peak. 

Secondly, there is the well-known fact that the actual cost of oil, even including transport and processing, is only part of the final fuel price. In Germany, as in most developed nations, the tax man demands a significant share: 48% of the total petrol price, 39% for diesel.

While energy taxes are set to a fixed amount per litre (€0,47 for diesel, €0,65 for petrol), the VAT on fuel is calculated as a percentage, which means the government gets more income from fuel tax when prices are high. However, the higher amounts people and companies pay for petrol and diesel are not spent (and taxed) elsewhere, so the state’s added overall intake from higher fuel prices is small to non-existent.  

Oil refineries

Also unlikely to benefit from higher prices: fuel pump operators. They operate in a sector with razor-thin margins, and typically rely on sales from their retail shop to turn a profit. With prices high, customer numbers will dwindle, as will the shop visits.

Russia itself is also unlikely to benefit from the increased oil prices, as those are typically set at the start of a long-time deliver contract. So who is benefiting from the discrepancy between fluctuating oil prices and high fuel prices?  

Robert Habeck, Germany’s economy minister (and member of the Green Party), is pointing towards the oil refineries. He has ordered the Federal Cartel Office to investigate whether refineries are abusing their power. The suspicion is that they are busy stocking up on petroleum, but releasing the finished products much slower. One could say that this is a blatant attempt to jack up the price for their work. Or one could argue that this is a prudent policy in light of the uncertainty of future supply. 

The answer to that question could help determine the future of Germany’s (and Europe’s) energy supply – and the price at the pump. 

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