Gas/Petrol Prices
I'm currently enjoying some downtime with the family in London and couldn't help but notice the petrol price: £1.59/litre.
It made me think two things. First, Americans don't have much to complain about - £1.59/litre equates to about $8/gallon vs ~$4/gallon they are currently paying. Second, most people assume the price they pay at the pump should move dollar for dollar with the price of oil, but that's not exactly true.
Crude oil is an important input, but drivers aren't buying crude oil. They are buying a product that has been refined, blended to local specifications, transported and stored, distributed through a retail network, and very importantly, taxed.
Each part of that chain has its own costs and margins.
Refining margins, or "crack spreads", can widen even if crude prices remain unchanged. Refinery outages, seasonal demand, inventory levels, and changes in fuel specifications can move gas/petrol prices independently of crude prices.
Taxes also make a huge difference. In the UK, fuel duty currently accounts for 52.95p of every litre, with 20% VAT charged on top. At a pump price of £1.59, approximately 79p, or half the total price is tax. This tax portion does not disappear simply because crude oil falls.
There is also a simple question of scale that often gets overlooked. Crude oil is quoted in dollars per barrel, while petrol is sold in gallons or litres. One barrel of crude contains 42 US gallons, so a $1 move in the price of crude equates to around 2.4 cents per gallon of crude input, all other things being equal.
Even a very large $20 fall in the crude price represents only around 48 cents per gallon when the change in raw-material cost is expressed in the same unit as the pump price.
But that does not mean petrol prices should automatically fall by 48 cents. It simply gives us a common unit of measurement.
A refinery does not turn an entire barrel of crude into petrol. On average, a 42 gallon barrel produces around 19-20 gallons of petrol, alongside diesel, jet fuel, and several other products.
The economics of that barrel are therefore spread across an entire basket of refined products, not petrol alone. The prices of all those products, and the margins earned by producing them, are constantly changing.
A change in crude price has to work its way through refinery margins, transportation costs, inventories, taxes, and retail margins before it reaches the consumers.
The point isn't that crude prices don't matter, they clearly do. But large crude price moves in dollars per barrel become much smaller numbers when converted into cents per gallon or pence per litre. There are also several other moving parts that sit between the oil market and the petrol station.
That said, as with many consumer markets, prices certainly seem to go up much faster than they come down.
