European Fuel Pricing Issue: Briefing Note – Shell’s View

Published October 18th, 2000 - 02:00 GMT

Current Status:Over the past 20 months the cost of crude oil has more than tripled from $10 a barrel to nearly $35 a barrel. This has been driven by overall shortages of supply largely created by the Organisation of Petroleum Exporting Countries (OPEC) constraining production.  

 

This, in conjunction with two other critical factors - the strength of the US Dollar and the increase in Government taxes on fuel - has caused prices to rise at the pump.  

 

Naturally, rises in the price of fuel have caused a great deal of concern among many groups including motorists, farmers, fishermen and haulage companies particularly. The latter are not always able to pass on the higher fuel prices to their customers, which subsequently causes real financial difficulties.  

 

This concern and anger has translated into blockades and demonstrations across a number of countries in Europe including the UK, France, Belgium and the Netherlands. In France and the UK a number of petrol stations ran out of fuel as a result of blockades at refinery and depot gates.  

 

The protests have been directed at reducing the levels of taxation on fuel which is, on average, across Europe, up to three quarters of the price of a litre of petrol.  

 

Pressure is also mounting on OPEC to increase production and therefore relieve the upward pressure on prices experienced over the last 20 months.  

 

In the current climate, companies operating in crude oil production are benefiting from high crude oil prices which, in turn, is the result of limited supply.  

 

However, the picture was very different 12 months ago when crude oil prices were very low (around $10/bbl). At this price profits were depressed and oil production was a much less attractive area to invest in.  

 

However, companies involved in refining and marketing have to purchase the crude at high prices and are therefore suffering substantial pressure on profits because intense competition prevents them raising their selling price in line with the increase in the cost of crude oil.  

 

Background Information: 

There are three key phases involved in the supply chain from the oil field to the forecourt: crude oil production; refining it into various products such as diesel, petrol or heating oil; and then marketing and distributing it.  

 

Each phase of the supply chain sells products into a marketplace in which prices fluctuate according to supply and demand and other factors such as the time of year and weather.  

 

The market for crude oil is subject to worldwide political and economic pressures as well as to the law of supply and demand. The key factor that influences supply and demand is OPEC, which changes crude prices by varying levels of production.  

 

Movements in the cost of crude oil do affect petrol prices but only indirectly. It takes time, for example, for lower crude prices to translate into lower prices on refined products because stock bought at the earlier higher price is still in the system.  

 

Once the crude oil has been refined, the products are traded on a secondary market - the principal market for north-west Europe is the Rotterdam market. This determines the daily price oil companies pay for products such as petrol.  

 

For refiners this market determines the price they charge to their own retail operations - if they have them - or independent wholesalers. Contract prices for buying or selling products on the Rotterdam market are known as spot prices. An organization called Platts tracks market transactions and reports the prices being agreed in the market.  

 

Crude oil and refined products are priced in US Dollars so businesses buying and selling products are also impacted directly by the strength or weakness of the US Dollar. The recent strength of the US Dollar against European currencies has compounded price rises in crude oil.  

 

Pump prices explained: 

There are three key components to the price of a liter of petrol at the pump. They are: the price of the base product (crude oil); Government taxes; and the cost of refining the crude oil, and marketing and distributing it to customers.  

The price of crude oil is based on the market dynamics described above. 

 

Government taxes - which form the largest proportion of the price at the pump - vary from country to country. In addition to raising revenue, Governments use taxes to influence the market place.  

 

For example, some countries raised tax levels in the 1980's when prices to consumers fell in order to maintain the drive for conservation and help the balance of payments deficits.  

 

More recently Governments have used taxation policies to influence customer preferences for environmental reasons, for example in encouraging the use of unleaded petrol.  

 

The third element of the pump price covers the cost of refining and distributing products to retail sites or directly to large customers.  

 

It also covers the cost of the retail sites themselves where they are company-owned (many sites are owned by the dealers). Over and above these costs, is the oil company's margin. The intense competition which is characteristic of many European countries means that this margin is wafer thin.  

Source: Shell.  

© 2000 Mena Report (www.menareport.com)

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