Why the omens look bad for future fuel costs as prices hit a 16-month peak

LAST WEEK, IT emerged that fuel prices are the most expensive they have been in Ireland for 16 months.

The AA’s price tracker, which can be viewed here, suggests that with unleaded at €1.36 per litre and diesel at €1.27, fuel costs are the highest they’ve been since August 2015.

That equates to €18 more for a month’s worth of petrol for the average motorist compared to a year ago.

But what causes the fluctuations? Are we at an all-time high in the annals of petroleum-expenditure? And is there any cheap fuel to be had?

Riding high

In a historical context, we are certainly not dealing with unprecedented petrol costs.

We are at our highest level in 16 months, it’s true, but that’s nothing compared with the highs of end-summer 2012 when demand greatly outstripped supply and unleaded petrol breached €1.70 per litre in Ireland and diesel hit €1.60.

Looking back to the dire days of 2008, prices were also higher than what’s being seen at present. In July of that year, a litre of diesel would set you back €1.44 – comfortably more than what’s being seen right now.

This chart gives an indication of how things have developed in Ireland when it comes to petrol expense over the past 13 years:

Click here to view a larger image

As you can see, prices in Ireland are cyclical, as they are virtually everywhere.

Here are some of the major things affecting prices at the pumps:

• Whatever Opec (the Organisation of Petroleum Exporting Countries, which accounts for about 40% of the crude oil produced worldwide) opts to do at any given time
• The demands of petroleum-dependent industries across the globe, such as the pharmaceutical sector
• Local competition among petrol vendors
• Worldwide exchange rates, as barrels of oil are generally priced by the US dollar
• Global conflicts
• The local political climate (expect Brexit to have a major effect on petrol prices in the coming months and years, for example)
• And last, but by no means least, taxation

Bargains to be had?

While the AA’s figures represent the average prices seen nationwide, there are significant variations in what is being charged across the country.

Using crowd-sourcing site Pumps.ie and data from the last three days, the worst places for high prices are counties Tipperary and Wicklow.

Click here to view a larger image

Click here to view a larger image

The lowest prices around the country at the moment are fully €0.15 and €0.20 less than the highest rates for unleaded and diesel fuel respectively.

So, there’s bargains available if you care to shop around – and, in some cases, are prepared to travel to fill your vehicle.

The lowest prices can be found in Louth and, oddly enough, Tipperary.

Click here to view a larger image

 Click here to view a larger image

Opec and friends

Back to the factors affecting fuel prices.

Crude oil is a different kind of commodity to electricity and gas – the prices of which are factored in some time in advance – hence the reason why domestic heating bills can take their time reflecting global market conditions. Changes in the price of oil take effect far more quickly.

Founded in 1960, Opec consists of 13 nations, including Saudi Arabia, Iran, Iraq and Kuwait, which in 2015 accounted for about two-fifths of global oil production – and nearly three-quarters of known oil reserves.

So when that organisation acts on the supply of oil, it’s a case of it sneezing and the world catching a cold. That’s exactly what it did in December, and it’s probably the single biggest reason why prices have risen recently.

“In December, Opec said it would cut back production to push the price back up again. They had said previously that they weren’t going to this time, but now they have,” says Lisa Ryan, professor of economics at UCD.

“They wanted to keep selling. Basically they had so much fuel it made sense to sell the whole load of it. They were afraid of losing market share as now Opec has competitors, such as Russia.

“In the long-term, it won’t work out that way but at the moment that is the case.

“That doesn’t change production – it’s more of a short-term thing. The amount coming out of the ground is unlikely to be affected.”

So, the price of oil increases and local retailers pass that increase onto the consumer?

“That’s basically it. In terms of fluctuation, you have other factors of course: A lot of crude oil is being used at present in the pharmaceutical industry, and that’ll have a knock-on effect; the exchange rate between the dollar and the euro; if there are wars being waged; or if there’s instability near OPEC countries. But in Ireland we’re still lower than in comparable countries, like the UK.

“They have the weak pound and Brexit, and that’s likely to continue for the foreseeable (future).”

Down the local

What about local prices?

“In terms of the local community, it really tends to come down to whether or not the seller has a competitor nearby or not. If there isn’t one, prices tend to be higher,” says Ryan.

“There can’t be anything orchestrated about it because then you’re dealing with a cartel.”

“You have to remember that nearly 70% of petrol price is excise duty and taxes – only about a third of it can be affected by the wholesale price”.

“It’s not the petrol that local stations are making money from these days – it’s the shop. That’s why you’re seeing bigger and bigger forecourts around the country. It’s where the money is to be made.”

She suggests that in terms of taxes and excise, the AA itself will argue budget hikes seen in recent years were emergency measures for emergency situations (Ireland’s recession) and now the emergency has receded but the charges remain. She’s correct in this assumption.

Conor Faughnan, director of consumer affairs with the association, thinks that “what’s changed is Ireland has added tax on top of wholesale charges”.

“Since the emergency budget of October 2008, there have been five separate tax increases applied to both unleaded and diesel. That emergency is over, the taxes should be over too,” he says.

Not unusual

He agrees, however, that the current increase in prices isn’t unusual. “Prices were also significantly higher in early 2015,” he says.

“Now though, we have a carbon tax. There’s no real difference between that and excise duty, it’s just called a carbon tax to make it smell nicer for the public.”

Faughnan argues that the removal of such taxes is what will bring down the prices seen at the pumps.

“Tax-free petrol would go for between €0.50 and €0.55,” he says.

“63% of the retail price of fuel here is tax, a load of separate duties all totaled up. If tax rates were at their pre-2008 levels then you’d be talking diesel at just over a euro, unleaded at maybe €1.10 a litre. But it’s the government that controls the levers on the machine.”

He does acknowledge the external factors also however.

“Recently the price of the barrel has gone up because of OPEC curtailing the market. But there are other factors.”

An ESB electric car charging point on a Dublin street

“Vast fortunes are made and lost speculating on oil. A barrel is bought and sold about 20 times en route to market. Speculators are in the habit of overreacting to what’s going on in the world. A bad headline from the Middle East and it swings one way. The next day it’s the opposite.

“Add into this oil companies, Opec, Vladimir Putin, Brexit … it all goes into the hopper.

“In the end though, if unleaded is €1.36 a litre, €0.85 of that is tax. The rest is external.”

The future?

So, are prices likely to rise or fall in the immediate future?

“The omens aren’t good to be honest,” says Faughnan. “All we’ve seen thus far in 2017 suggests a year in which oil will be more expensive, unfortunately.”

Lisa Ryan doesn’t think that is necessarily the way the world is going however. An expert in renewable energy, she believes that people will eventually seek their savings elsewhere.

“In the US you always had huge cars, then when oil was at its highest in the early 2000s there were far less SUVs on their roads,” she say.

Is she talking about an electric future? “In my experience (she worked for Volkswagen in the previous decade), the problem has always been the batteries. It’s called ‘range anxiety’. People don’t want to be restricted in where they can go.

“But if people see prices going only one way, they’ll think twice when buying a car. And they’ll drive less. Long-term, we’re going to be using electric vehicles, even if it’s a case of using one for short-haul driving.”

More intriguingly, she can see a future where we don’t bother to own a car.

“It’s cheaper to rent a car if you hardly ever drive,” she says. “That’s fact. That’s where a business like GoCar (on street car rental – the same principle as Dublin Bikes for cycling) could be very useful to someone who cottons on to what their expenses are,” she says.

“Taxes, insurance, upkeep – it all adds up. Even taxis are cheaper really. This is the future, when people look at the cost, they may decide accordingly.”

Written by Cianan Brennan and posted on TheJournal.ie