What effect do movements in international oil and gas prices have on our fuel prices?

As traded commodities the day-to-day prices at which gas and oil sales are made are established through contracts agreed at the world’s major trading exchanges ¹. Commodity or wholesale prices vary with each deal and trend up or down over time reflecting the state of suply and demand. Sooner or later all movements in international oil and gas commodity prices find their way through to customers’ bills. However, the commodity cost is only one part of the price that the end user pays. A doubling of the $ per barrel oil price may not double the price of petrol; it might only increase the forecourt price of petrol by a quarter or less.

Duties and taxes weigh heavily on Irish fuel prices, accounting for over two-thirds of the total price in January 2016, and so play a key part in arriving at the pump price.

Likewise, if the wholesale price of gas was to halve, the reduction that the end-user would see in their gas bill would be much less than a half. This is because the cost of providing the gas transmission and distribution system accounts for about 40% of the bill and is largely unaffected by the commodity price of gas.

There are separate and distinct processes for pricing crude oil and finished products like petrol and diesel.  The trading and daily pricing of Brent Crude is often quoted in the media, but of more relevance to us in Ireland are the price reporting systems for finished products like petrol, diesel and kerosene since most of the oil that we import is already refined.  One such reporting system is run by Platts who provide market information and daily benchmark price assessments of actual physical transactions in regions of the world. Benchmark prices for the region comprising Amsterdam, Rotterdam and Antwerp (ARA) are used as a reference price for products that are imported and sold in Ireland.

Some of the costs that go to make up the final price for oil and gas are industry non-commodity industry costs; these include the costs of refining, shipping and transport (mainly for oil), transmission (mainly for gas) and finally distribution, delivery and billing.

Other non-commodity costs such as government taxes and levies can, as with petrol and diesel, far exceed the commodity cost.

Excise duty and carbon taxes are set at fixed amounts per unit and do not change as the price fluctuates. Similarly, VAT stays at the same percentage regardless of movements in international prices. In the case of petrol and diesel, part of the pump price is driven by suppliers’ compliance to the Government Biofuels Obligation Scheme which aims to increase renewables in transport to 10% by 2020 (through a combination of electric vehicles and biofuel mixing) as part of our National Renewable Energy Action Plan.

For crude oil, the most important price benchmarks are West Texas Intermediate (WTI) in the USA and Brent Crude in the UK. Given that oil is traded in dollars, the US dollar exchange rate with the euro also impacts on prices.

Recent low oil prices in 2015 and 2016 partly have resulted from issues related to oversupply; increased production of tight oil from fracking in the US and higher-than-expected OPEC output in countries such as Iraq, Libya and Saudi Arabia. Demand has also been weaker than expected in Europe and Asia. In Europe lower product prices  quickly pass through to the retail market and forecourt prices. As pump prices decline, fuel taxes, albeit fixed, increase as a proportion of the retail price ².

The price of oil products such as gasoline, kerosene, fuel oil and so on, correlate strongly with the crude oil price because of the high share of crude oil in their production. Regional price differences in Europe are mainly due to transport costs, tax regimes and the local balance of production and demand.

Oil prices and the price of oil products have little direct impact on electricity prices in Europe except for in countries, like Malta, which are highly dependent on oil for their electricity production ³. The most important indirect impact of oil pricing is its influence on the price of natural gas, reinforced by the fact that gas-fired power plants often set the wholesale price within electricity markets.

Factors which could reduce the impact of the international oil price on EU energy prices include increasing LNG markets, increasing US gas production, potential US gas exports, potential European shale gas production, high network charges and taxes on retail energy and increased use of renewable resources. Energy efficiency and renewable energy sources reduce the demand for fossil fuel energies and thus contribute to easing the pressure on fossil fuel prices. On the other hand, increased demand for gas with reduced supply capacity, weakening controls and lower network charges can reinforce the impact of oil prices ⁴.

Irelands target under the EU Renewable Energy Directive for the share of its gross final consumption of energy from renewable sources by 2020 is 16%. Within that renewable energy is to make up at least 10% of the final consumption of energy in transport.

To meet this Directive, the Government introduced the Biofuels Obligation Scheme. Currently, suppliers are required to ensure that 6.383% (by volume) of the motor fuel they place on the market in Ireland is produced from renewable sources e.g. ethanol and biodiesel ⁵.

There are currently some specification constraints on the quantity of biofuels that suppliers can add to meet the EN 228 standard, petrol can only contain a maximum of 5% ethanol and to meet the EN252 specification, diesel can only contain a maximum of 7% biodiesel. To comply with the EU Directive this blend rate will be increased to 10% by 2020 ⁶. Given that our finished products must contain this volume of biofuels, this particular component of the final price of petrol and diesel is not affected by movements of the commodity oil price.