The invasion of Ukraine has upended already-turbulent energy markets and now diesel has hit record highs of 180p a litre – 36% up on January 2020, before the pandemic. EU diplomats are aiming to agree an approach to phasing out Russian oil this month, threatening further disruption which could push diesel and petrol prices even higher. But, against this backdrop, oil prices have actually fallen from their peaks in March in the early weeks of the war. Here’s why those falls are not feeding through to the pumps.
Why is diesel soaring in price?
“There are various factors at play,” says Shore Capital analyst Craig Howie. “There’s been an increase in trucking activities, stretching demand; concerns over exports to Europe from Russia, shutdowns in the US and lower refinery runs in China. From an oil perspective China has been a concern. Tough restrictions on movement have hit demand but lockdowns have also reduced some refining capacity too.”
The US Energy Information Administration estimates that stocks of US distillates – typically diesel and petrol – fell 8% in March to 24% below the five-year average. Refining oil for petrol is historically more valuable for refineries, but Russia was a large diesel exporter meaning demand for diesel refining elsewhere has pushed up the price from refineries in other countries.
Are there enough oil refineries?
Western oil refineries have struggled in recent years. The fall in the oil price due to Covid hurt an industry that has struggled to attract investment into facilities amid increased environmental regulation and worries over peak oil demand. Many of the refineries supplying Europe are based in Russia, while Beijing closely controls how much Chinese refiners export.
In the UK, there are six large refineries. There have been concerns over the finances of Essar Oil, the company behind the Stanlow refinery, while unions have called for a meeting with Scottish first minister, Nicola Sturgeon, amid uncertainty over the future of Grangemouth. In theory, the boom in refining demand should have helped them, although the oil price spike in March will have inflated their input costs.
So why are crude oil prices falling?
Oil prices remain high compared with a year ago when Covid lockdowns around the world hurt demand for fuel. But oil is well off the 10-year highs of $119 a barrel seen in March as Russia’s invasion of Ukraine shook markets. The International Energy Agency warned then that western sanctions on Russia would remove 3m barrels a day from the global oil market. Now the agency has said rising output from other oil producing economies and slowing demand growth could ease the situation.
Don’t the prices move in tandem?
Typically, they do. The oil benchmark followed by investors and analysts is West Texas Intermediate (WTI), a crude oil used by refiners. After the oil is refined, it is then used in products like diesel and petrol. The price of both WTI and refined products usually move in lockstep, but recent months have seen them diverge. Crude is hovering around $110 a barrel and normally wholesale prices for refined products would be just a few dollars higher, but jet fuel has soared to as much as $275 a barrel, Bloomberg reported. Diesel is around $175 a barrel and petrol $155.
Refining margins are calculated using “crack spreads” – the overall price difference between a barrel of crude oil and the petroleum products refined from it. The spreads have been extremely strong of late – the average US crude spread is at its highest since 1988.
Are fuel retailers profiteering?
The RAC has accused retailers of taking 2p more in profit a litre than before the chancellor announced a 5p cut in fuel duty in March’s spring statement. The body argues that supermarkets and other petrol retailers may be making £7m a month in extra profit. Industry sources counter that the cut was passed through, but the increase in refining and logistics costs since have put pressure on their costs. “Our prices are on huge signs at the front of the forecourt, so it’s a very competitive industry. Retailers have always fought it out to keep prices low,” one retailer said. A spokesman for Boris Johnson said Asda, Tesco and Sainsbury’s have passed on the fuel duty cut and that Kwasi Kwarteng, the business secretary, will write to the industry “to make sure that everyone is passing on these cuts on the forecourt”.
What can the government do?
Conservative MP, Robert Halfon, has called for a “pump-watch regulator” to monitor prices while Liberal Democrat leader, Sir Ed Davey, has called on Boris Johnson to haul petrol retailers into Downing Street to explain why the fuel duty cut has not been passed on.
The RAC argues Sunak should cut VAT to 15% from 20%. “Drivers are still paying 27p VAT on petrol and 29p on diesel, which is just the same as before the spring statement,” says the RAC’s Simon Williams.