Crude rally pumps up petrol cost: Rising prices fall on motorists

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The Independent Online
THE oil price rally was given fresh life last week, as prices for crude oil on immediate delivery rose above dollars 18 a barrel for the first time in a year.

Four months ago, they were languishing at under dollars 14 a barrel, the lowest since 1988. But if this 40 per cent jump in crude prices is good for the oil companies, it is not so great for the public, as it will almost certainly mean pump prices rise.

The oil majors claim there is no direct correlation between crude prices and those on the forecourt. 'The key factor that drives petrol prices is the Rotterdam gasoline price,' a Shell UK Oil spokesman said. However, this is somewhat disingenuous since gasoline is a crude distillate. 'Over time the Rotterdam price does track the crude price,' he conceded.

Even so, it is hard to quantify the impact of crude oil price hikes, partly because oil is traded in dollars and so foreign exchange rates play an active role in determining the pump price. Moreover, in Britain at least, excise duties and taxes cost far more than the product itself.

According to figures from Oil Price Assessment Ltd, an independent consultancy, the current national average for branded four star leaded petrol is 56.8p per litre, of which 41.6p is duties and tax. Average gross margins account for another 6.26p per litre, with product costs running at just 9p a litre. 'Any change in crude or product prices has to be seen in this context,' said Robert Olle, director of Opal. 'Anybody who thinks they can write an equation to predict pump prices in the UK from crude oil movements is either a complete phoney or could make a fortune.'

But though it is not possible to predict by how much pump prices will rise, whether they will rise is another matter. Data from Opal shows that, since the start of the year, product prices have risen 5 per cent, from 14.43p to 15.2p per litre. With duties and tax rates constant since the Budget last November, this translates into a 1.5 per cent rise, from 55.9p to 56.8p, in the average price of four star leaded petrol.

But apart from such historical evidence, two other factors suggest that pump prices are on their way up. First, retailing margins - at 6.26p a litre - are at their lowest since 1991. Second, as crude prices rise, there has been a squeeze on refining margins worldwide.

The oil majors came in for flak earlier this year when, as crude prices fell and refining margins widened, they failed to pass on the benefits to consumers. They are equally unlikely, while the market remains so competitive, to pass on all the costs. Nevertheless, they are naturally anxious to preserve their margins, said Mehdi Varzi, oil analyst at Kleinwort Benson. 'Pump prices haven't gone down in recession, so it is very hard to see how they can remain flat in light of a 40 per cent rise in crude prices.'

In fact, many industry experts believe that the supply- demand balance will be very much tighter by the end of the year. The oil team at NatWest Securities, for example, predicts that Brent crude will average just more than dollars 16 a barrel for 1994, with prices rising to dollars 19 in 1995 and dollars 21 in 1996.

Several key developments lie behind the strengthening oil scenario, among them the discipline Opec has shown in recent months. It has not only stuck closely to its agreed production quota of 24.52mbd (million barrels a day), but has also cancelled the usual third-quarter meeting in September, to prevent a new bout of haggling.

This does not preclude the possibility that some members of Opec will unilaterally increase output - as they have so often done before when prices are rising. But, with the exception of Saudi Arabia and Venezuela, most are thought to be operating at their maximum sustainable levels. In addition, Nigeria and Algeria have been suffering from civil upsets and technical problems, which have limited their output.

If, one way or another, the lid has been kept on production levels, increasing demand has also contributed to the rise. A cold snap in the US has been followed by incontrovertible evidence of recovery. 'The oil price uplift is largely a demand recovery story, especially in the US, which consumes about 19mbd and is the largest market in the world,' said Graeme Gilchrist, oil analyst at BZW.

In the longer term, however, he is wary of forecasting huge surges in oil prices, not least because Iraq is expected to come back on stream next year. Safa Hadi Jawad, the Iraqi Oil minister, said last week that when the UN sanctions were lifted Iraq planned to produce 2mbd, rising to 6mbd. It is unlikely that Iraq could achieve this, Mr Gilchrist said. 'But it could certainly come on at about 1.5mbd and build up to 3.5mbd within two years.'

With recovery still fragile in much of continental Europe, this could be more than enough to meet rising demand, leaving prices at the pump rather more palatable than otherwise.