Why has the price of petrol gone down as oil prices fell but the price of gas not fallen by the same amount as international gas prices?

The oil market is truly global and the reference prices for oil revolve around the benchmark prices of Brent crude and West Texas Intermediate (WTI). Excluding taxes, the commodity part of the cost of a gallon of petrol or diesel is 90% raw material with refining and shipping accounting for the balance. Oil products such as petrol and diesel react fast to changes in crude prices because of the high share of crude oil in their production ¹. This results in changes in the commodity (shown in green) part of the pump price, shown as cost in Figure 7 below, which in January 2016 were a quarter of the pump price.

Gas is largely traded on regional markets where supply, demand, and fixed infrastructure constraints play a bigger role. Some of these constraints are addressed through long term regional contracts, through gas storage, and by linkage to other sources of supply such as liquified natural gas (LNG). Such long-term supply contracts are helpful when new investment in infrastructure is required at least cost and also for gas supply companies who need to set tariffs in advance to compete and reduce risk.

As the natural gas industry developed through the 1960’s to the present day there was a tendency to link gas prices to oil prices. With the growth in gas reserves worldwide there has been a move to rely more on markets to determine prices. However, those markets have a strong regional bias and there are wide price differences (Figure 8). For example, US gas prices have decoupled from oil while European prices are influenced by some Russian oil-price referenced contracts. Japan had historically the highest prices primarily because of oil-price referenced contracts.

Since gas prices started falling on international markets in 2014, the price of natural gas for residential customers has fallen by 3.5% to 4% depending on the supplier. Falling international prices have also had a knock-on effect people’s electricity bills with the average bill falling by 2% to 4%, again depending on the electricity supplier ³.

Wholesale gas prices, the price Irish gas suppliers pay for gas on international markets, dropped by 18% during 2014 so both gas and electricity bills for consumers and businesses were expected to fall over the following months. Gas and electricity suppliers fix their prices to domestic customers in advance. To offset the price risk, suppliers buy gas in advance at fixed prices so it takes time from when prices start falling for the reductions to appear in consumer’s bills (Figure 9).

While international natural gas prices fell more than 18% in 2015, the weakness of the euro against the dollar meant that the fall in Irish wholesale gas prices was not as big as the UK. This is because gas is priced in dollars on international markets, therefore when a euro buys fewer dollars, it also buys less gas.