Analysis: reduced oil prices and increased refinery capacity will see drivers pay less for fuel at the pumps
Petrol pump prices are a reliable indicator of the state of the political world around us. If prices are excessively low or high, it means that something unusual has happened somewhere on our planet.
In Ireland and across Europe, we have witnessed record petrol and diesel prices this year driven initially by the rapid bounce back in the global economy from Covid. This was then amplified by the invasion of Ukraine by Russia and associated sanctions, which resulted in less oil and less oil products being available to global markets. This led to a situation where the demand for petrol and diesel outran the ability to supply it and prices increased across the globe in response.
Traditionally, movements in international oil prices were the main determinant of whether petrol and diesel prices would go up or down in Ireland. But a new dimension of global refinery capacity has become important of late. When extracted from the ground, crude oil is essentially useless and needs to be separated and refined into useful products like petrol and diesel in large industrial refineries.
The availability of refineries to do this job is important because it impacts supply. But several large international refineries have closed in recent years for various reasons, from lack of investment to low profitability. This meant that there were fewer facilities to process crude oil into petrol and diesel internationally and this lack of availability pushed up the prices remaining refiners were able to charge. Oil refineries are also very large users of electricity and natural gas and the overlapping international fossil fuel crisis added to refinery costs.
The final element impacting a refinery’s ability to turn oil into petrol and diesel is the nature of oil itself, which has different physical characteristics depending on where it comes from in the world. Because not all oil is the same, not all refineries are the same and most are set-up or ‘tuned’ to handle specific types of oil from certain parts of the world. When European sanctions limited Russian oil imports, it especially impacted refiners in Europe whose systems were set up and tailored to process Russian crude.
All of this – an increase in international oil prices, a reduction in global refinery capacity and sustained demand for petrol and diesel – put significant upward pressure on the price we pay at forecourts. They are also important factors when understanding future petrol and diesel prices.
In the months ahead, the outlook for these elements has changed and we are seeing a reduction in forecourt fuel prices, which I’d expect to continue to fall and dip under €1.70 or lower by month’s end. This is because international oil prices are falling, as a global recession is expected and demand for oil is forecast to reduce because lower economic activity means less trucks on the roads and less driving.
Equally, the outlook for new global refinery capacity is positive. Several large facilities are coming online this year so it will be easier to process more oil into petrol and diesel, which again increases supply and lowers prices.
Both these international trends will drive down the cost of petrol and diesel. But the role of national taxation is also important in understanding future prices because about half of the price we pay at the pump is made up of tax. In Ireland, the tax on petrol and diesel has a fixed and variable component which impact pump price dynamics. The fixed component is known as a Mineral Oil Tax and is made up of a Carbon Tax and an Excise or Duty.
While the carbon tax attracts much political attention, it is smaller (11 cents per litre for diesel) than the excise, which is a fixed amount (42 cents per litre for diesel) that was reduced to 30 cents per litre in April in response to the energy crisis. VAT is the variable component and is currently charged at 23% on top of the other taxes. It is applied to the price of the crude oil refined to make the petrol and diesel which varies depending on market conditions.
Despite the reduction in excise in April, the taxable element for the government of diesel in Ireland has remained stable at just under 80 cents per litre because the variable element of VAT has increased with higher international oil prices. The Government will have to consider when to reinstate the previous level of excise as price drops.
This decision will have to be balanced with the wider fossil fuel price crisis in Ireland and Europe. While oil prices will drop, international natural gas prices, which determine the cost of electricity in Ireland and heating bills for the 700,00 homes that use natural gas, are expected to remain excessively high across the upcoming winter.