It’s a familiar story for any driver: you get to the petrol pump only to find that fuel is more expensive than ever before. Only thing is, the station down the road is still on last week’s prices. Then, a few days later, everyone’s prices are back down. Then they’re up even higher. You could go crazy trying to predict fuel prices week-on-week.
While it might seem that petrol costs are decided at random, there is in fact a lot more to petrol pricing than fuel company competition. Fuel production is a vast industry covering many areas of the globe. This means that there are many influences affecting oil prices including ecological, political and financial ones. Taking a look at some of the factors affecting fuel prices might help to keep your blood pressure down next time you’re paying more at the pump.
Production and Infrastructure Costs
Filling up your tank is the end of a mammoth journey for your petrol. This has undergone a long process of being extracted from an oilfield as crude oil, transported to a refinery, made into a useful fuel and distributed to your local petrol station. Oil production is an industry in itself, with many companies competing to supply the infrastructure used by fuel companies to obtain, create and deliver their products.
This competition can actually work to the consumer’s advantage, as fuel companies who are able to produce petrol more cheaply are able to reduce the cost of their product without impacting their profits. Take linepipe costs, for example. Linepipe is the specialised piping used to transport fuel from oilfield to refinery, and can represent a serious expense for fuel companies. By choosing a cost-effective linepipe supplier, these companies can gain a crucial competitive advantage.
Supply and Demand
As with many sectors, prices in the fuel industry are heavily dependent on matching supply with demand. If there is a sudden rush to buy petrol, or if production levels fall, prices will likely rise as companies look to maximise profits. Conversely if demand falls or if a surplus of petrol is produced, prices generally fall as companies look to reduce stock levels and get the market moving again.
Fuel industry supply and demand is regulated by OPEC – the Organization of Petroleum Exporting Countries, which works to minimise the at-pump effects of supply and demand and keep the cost of crude oil at a stable level. At present, their target value for crude oil is around $70 per barrel, although this is not always an achievable goal.
Natural Disasters and International Crises
Natural disasters can have a devastating impact on the fuel industry. One of the most recent examples of this was seen during Hurricane Katrina, which caused millions of dollars worth of damage in America’s oil producing regions. With US refineries unable to function, the price of oil shot up for several weeks, and was only brought under control when the US Government authorised the release of some of its crude oil reserve into the marketplace.
In much the same way, unrest in oil-producing areas can produce a ripple effect felt at petrol pumps all over the world. Many of the main oil fields in the world are located in countries with a long history of political and civil unrest. The Arab Spring saw a sharp rise in petrol prices, with nervous investors unable to predict how long existing fuel stocks would last or what future production levels would be.
Fundamentally, the fuel industry’s sensitivity to crises is an extension of the supply and demand factor: if refineries are unable to produce, supply is lowered, and prices increase as a result.
William Bancs is an experienced fuel industry analyst and freelance writer. He has been keeping a close eye on the cost of linepipe for several years.