26 July 2022
Critics blame the cost of fuel on many factors, including tax levels and greedy forecourts, but the main reason is far more complex, and hidden deep in a stressed supply chain.
The UK is facing record fuel prices, with diesel reaching nearly £2 per litre on average, protests have taken place on the motorways and fleet managers are looking for ways to reduce their spend on petrol and diesel.
Why are prices staying so resolutely high? There are several factors and one opinion, often aired is that fuel retailers are quick to put prices up, and slow to bring them down.
Over the years, evidence has shown in general that the difference between wholesale and retail prices are closely linked. The wholesale price of fuel consists of the production costs to turn oil into petrol or diesel, and fuel duty; while the retail costs include those but also factors in delivery and distribution, forecourt costs, retailer profit margins, sales and marketing and VAT.
But have wholesale and retail prices detached as retailers look to make more profit this year?
In recent weeks, the Competition and Markets Authority was commissioned by the Department for Business, Energy and Industrial Strategy to see if the relationship between the two prices has changed in 2022.
Its report found ‘the gap between wholesale prices and retail prices has not been a significant contributor to the overall rise in pump prices’, while the extra costs for retailers meant they were not making excessive profits from the high cost of forecourt fuel.
One of the issues is that retailers will be buying wholesale fuel weeks before it is sold on the forecourt, so there is a lag in the process. Even when the fuel duty cut was announced the CMA found it was applied fairly by retailers, and as our graph of wholesale prices show, there has been huge variability in recent months compared to a ‘normal’ year – both up and down.
As a result, it is incredibly difficult for a retailer to predict prices it sells at from when the fuel was bought.
The price of oil is high, but not exorbitantly so. At the end of July 2022, a barrel of Brent Crude cost around the £93 ($110) mark, which is similar to prices between 2011 and 2014. But during that period, the cost of petrol and diesel was lower, with the highest average price for diesel recorded at about 147p per litre. Now, those average prices are nearing 200p per litre. So, what is contributing the record numbers seen at forecourts?
The Pandemic Effect and Capacity
The issue is refining costs, both in the UK and globally, which have increased.
Refineries turn - or ‘crack’ - crude oil into products such as petrol, diesel and jet fuel, and the cost of this process is called the ‘crack spread’, which in turn is then factored into the wholesale, and therefore retail price of fuel.
For around 30 years up until 2021, the crack spread averaged around $10-11 per barrel, and rarely went above $20. However, in May this year in some places, it had reached $55 and even higher for some fuels: overall prices after refining costs were added equated to around $155 for petrol and $175 for diesel. Jet fuel hit $275.
The issue is one of capacity. Quite simply, there are not enough refineries and too much fuel is needed.
There were problems with oil refineries’ business models before the pandemic, where they were struggling with profitability while also having to manage increasing environmental legislation, higher running costs and the spectre of obsolescence as electrification takes over.
As a result, in the UK for example, the number of refineries has dropped from 19 in 1975 to six now, and capacity currently stands at around 60m tonnes a year, down around 20m tonnes from a decade ago and well below the peak of nearly 150m tonnes in the early 1970s. Globally, refining capacity fell by 730,000 barrels a day in 2021, the first fall in three decades.
Now, with the increase in demand for fuel post-pandemic, refineries have been able to charge much higher prices, and reap higher profits for their work. According to Bloomberg these refiners are making record profits, whether independent (as many of the UK refineries are) or owned by oil companies.
Shell, for example, saw its refining profits increase by up to $1.2 billion in Q2 2022, saying its global fuel refining business had almost trebled margins to $28 per barrel in the second quarter, from just over $10 in the first.
The Russia problem
Another problem is Russia. Not just in terms of oil supply, but refining capacity. Diesel is typically less profitable to refine than petrol or jet fuel, and Russia was a major refiner of it. Since its invasion of Ukraine, oil traders think that the resulting sanctions have taken as much as 1.5 million barrels a day of diesel and semi-refined oil off the global market.
As a result, western refineries – and especially those in Europe - are having to produce more diesel, and are consequently charging more to do it.
What can you do to reduce fuel costs?
Paul Holland, MD of UK Fleet, Allstar Business Solutions, says that fuel prices may fall if demand drops and refineries consequently charge less, but otherwise fleets best strategy is to buy smarter and manage vehicles more effectively.
“Quite simply, there is a global refining bottleneck which is pushing up the cost of fuel, and until capacity is improved, or demand drops, prices will remain high, no matter the cost of oil.
“The wholesale cost after refining does in fact mirror the retail cost despite what critics may say. Yes, oil companies are making big profits, but these are at the production, not the retail, stage.
“So, what can fleets do? Quite simply, buy smarter. The CMA report, and our figures, show that supermarkets are often the fastest to pass on savings, and where there is more competition, such as in urban areas, prices will generally be lower. The CMA commented on this, and it is something our research shows.
“Then there’s the issue of control. Fuel cards help control spend, allow fleets to analyse economy and influence drivers to buy cheaper fuel. There are many global factors at play, which may keep prices high for a while yet, but at a local level fleets can optimise their fuel purchasing to ensure they are buying at the cheapest possible prices.”
Read 5 ways a fuel card could help you to save money for more information on how fuel cards can benefit your business.