The British competition authority is concerned about the difference between the price of crude oil and the price at the pump
The British competition authority notes that the refining gap, not to say the refining margin, tripled last year. Worried about such a trend, harmful to the economy and consumers, she specifies the impact of this “practice” on prices at the pump: according to her calculations, the difference “added 24 pence (28 cents euros) per liter of fuel” for motorists.
Pump prices go from record to record in the UK
The price at the pump flies from record to record in the United Kingdom. In June, refueling an average family car cost 105.29 pounds (nearly 125 euros), according to the road user association RAC. Enough to fuel an inflation that has not been seen for 40 years.
Increase in demand and decline in refining capacity
Among the various factors explaining such a situation, let us first note the increase in demand after the end of health restrictions, even though certain refining capacities had been shut down during the pandemic.
A situation to which must be added the consequences of the war in Ukraine and the impact of the sanctions taken against Russia, a major exporter of refined products, according to the CMA.
The refining margin at a “worrying” level
“While there is no escaping the global pressures driving fuel prices higher, the growing gap between the price of oil and the wholesale price of gasoline and diesel is concerning,” commented Sarah Cardell, chief legal officer of the CMA, quoted in the press release.
“We need to determine if there are legitimate reasons for this and, if notwhat steps can be taken to address it,” she added.
Difference between the price at the refinery outlet / price at the pump almost stable
On the other hand, while the difference between the refinery exit price and the price charged to motorists has certainly fluctuated, its level has remained around 10 pence per litre, according to the CMA report, commissioned last month by the Minister of Energy and Enterprises Kwasi Kwarteng.
At the end of March, the British government announced a reduction for 12 months of 5 pence per liter of fuel taxes, and this rebate “appears to have passed on to prices”, notes the CMA in its press release.
In-depth market research
The regulator said it launched an in-depth market study on Friday, the first conclusions of which will be published in the fall.
But while the fuel retail market “appears to be competitive”, there are also areas that merit further investigation, particularly to determine “whether price differentials between urban and rural areas (where fuel is more expensive) are justified “, adds the CMA.
Refineries take advantage of soaring oil prices
In early June, Refinitiv reported that oil refineries were making almost five times more money from oil refining than they were a year ago.
Indicating that the lack of ability to refine gasoline and diesel from crude oil has indeed helped push fuel prices to record highs and boost profits for refinery owners.
The shortage of refining capacity has resulted in a substantial increase in the “refining margin” – the difference between what they pay for crude oil and what they can earn selling the refined products. “This is a real crisis in terms of the industry’s ability to produce these fuels. This is largely reflected in the wholesale price of diesel and gasoline,” the specialists say. And this has contributed to the fact that although oil prices are still far from record highs, gasoline and diesel are setting new records day after day.
A phenomenal increase in refining margins
Figures from data firm Refinitiv show how profitable the oil refining business has become over the past year. On June 8, 2021, refiners earned $9.26 per barrel refining gasoline and $6.84 per barrel refining diesel. At the start of June 2022, they earned $43.11 on gasoline, up 366%, and $51.13 on diesel, up 648%. Figures released by BP, which owns a number of refineries in Europe and the United States, show its own measure of refining profits, the “refining marker margin”, falling from $7.7 a barrel to $35, $7 over the past year…
Last May, the Financial Times quoted the chief executive of the American oil giant ExxonMobil, Darren Woods, who considers that the “very, very high margin environment” is not “good for economies around the world”.
Refiners do not set margins themselves
A source close to a major refinery owner argued last June that refiners do not set margins themselves. Crude oil, gasoline and diesel prices are determined by the market based on the availability of available supplies and the price buyers are willing to pay, he said.
Global shortage of refining capacity
Prior to the invasion of Ukraine, much of Europe’s supply of gasoline and diesel was made at Russian refineries and imported in tank trucks. For example, in 2020 the UK received 18% of its diesel supply from Russia.
Although this supply has not been completely interrupted, volumes from Russia are significantly lower, with buyers turning away from Russian exports even before the sanctions take full effect. Fuel stocks were low before the invasion and there was already a global shortage of refining capacity. The sector has not been very profitable in recent years and has attracted little investment.
There is therefore no room for maneuver to compensate for the lost Russian refining capacity.
Sources: AFP, BBC, Financial Times