Why don’t petrol prices decrease when crude oil prices fall?

The relationship between crude oil prices and petrol prices at the pump can be complex and influenced by various factors beyond just the price of crude oil. Here are several reasons why petrol prices may not decrease proportionately when oil prices fall:

Refining Costs and Margins: Crude oil needs to be refined into petrol and other petroleum products before it reaches consumers. Refining costs, which include processing, distribution, and refining margins (profit for refineries), can remain relatively stable or fluctuate independently of crude oil prices. If refining costs or margins do not decrease along with crude oil prices, the savings may not be passed on to consumers.

Taxes: Taxes imposed by governments can make up a significant portion of the retail price of petrol. These taxes are often fixed per litre and do not fluctuate directly with changes in crude oil prices. Therefore, even if the cost of crude oil decreases, taxes can keep the retail price of petrol from dropping proportionately. In Australia, the fuel excise is 46c per litre. It is then indexed every 6 months to upward movements in CPI.

Exchange Rates: Crude oil is typically traded in US dollars globally. Exchange rate fluctuations between the US dollar and local currencies can affect the cost of imported crude oil for countries that do not produce enough domestically. If the local currency weakens against the US dollar, it can offset any savings from lower crude oil prices, thereby keeping the retail price of petrol stable or even increasing it.

Market Dynamics and Competition: The retail petrol market is competitive, but competition may not always lead to immediate or full pass-through of lower costs to consumers. Retailers may maintain prices at higher levels to protect profit margins or to cover other costs in their operations.

Supply Chain Considerations: The supply chain for petrol involves multiple stages, including transportation, storage, and distribution. Costs associated with these stages, such as logistics, storage fees, and transportation costs, can also influence the final price of petrol and may not adjust immediately with changes in crude oil prices.

Consumer Behaviour and Demand: Consumer demand for petrol can be relatively inelastic in the short term, meaning that changes in petrol prices may not significantly affect consumer behaviour. As a result, retailers may be less inclined to lower prices in response to decreased crude oil costs if they believe consumers will continue purchasing petrol at current prices.

While crude oil prices are a significant factor influencing petrol prices, the final retail price at the pump is influenced by a combination of refining costs, taxes, exchange rates, market competition, supply chain dynamics, and consumer demand. These factors can mitigate or delay the pass-through of lower crude oil prices to consumers, resulting in petrol prices that do not necessarily decrease in line with declines in crude oil costs.

Lauren Hua is a private client adviser at Fairmont Equities.

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