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Blame game in Europe as pump prices lag drop in crude oil

By Reuters - Dec 06,2014 - Last updated at Dec 06,2014

LONDON — A slide in the price of crude oil is not being matched in Europe by a fall at the pump, and as political pressure for cheaper petrol mounts, retailers and consumer groups differ over what causes the lag.

Retail petrol taxes and the strength of the dollar mean that drivers in Europe cannot expect to see the full benefit of the more than 40 per cent drop in crude prices since June.

Even accounting for these factors, however, the gap is still wide.

European Commission figures show that price reductions for consumers in many of the largest economies amount to less than half the fall in wholesale refined fuel prices, even when taxes and exchange rate moves are taken into account.

In Britain, for example, petrol prices at filling stations fell just 6.1 per cent between June and the start of December, and 14.1 per cent when tax is taken out of the equation. That's less than half the 35.5 per cent tumble in the spot wholesale price at the Amsterdam-Rotterdam-Antwerp hub after taking currency fluctuations into account.

Britain's Finance Minister George Osborne has warned oil companies that the government will be watching carefully whether the fall in prices is passed on to consumers.

 

 

Margins hidden

 

Drivers' consumer group AA said, meanwhile, that the lack of public information on wholesale fuel prices keeps the margins of retailers and middlemen hidden and makes it difficult for buyers to demand price changes.

"It all hinges on what retailers decide to do. They do pass along their reductions, but they take their time," said AA spokesman Luke Bosdet. On the other hand, when crude prices rise, retailers quickly start raising prices, he remarked.

The retailer may or may not be the one to benefit from widening margins as crude falls, given that the distribution chain also includes traders and gasoline blenders. The price also depends on the contract the retailer may have negotiated with the refiner or supplier.

"Without transparency, we can't see who is making what and where they are adding the margin," Bosdet indicated.

Retail analysts who cover British supermarket chains such as Tesco and Morrison said fuel sales are an increasingly important source of income for them and that falling wholesale oil prices will support their margins at a time when competition is fierce over food and other products.

The analysts could not break out specific figures, however, for the retailers' margins on petrol sales.

In the United States, by contrast, pump prices respond to declines in the crude price almost immediately, analysts said, due to greater retail competition, lower taxes and the fact that retail and wholesale prices are both denominated in dollars.

The US government publishes wholesale prices regularly, which ensures consumers will pressure retailers to pass through savings, the AA said.

The AA data shows the overall margin on petrol in Britain was 6.4 per cent in October and most of November 2014 versus 4.7 per cent in the same period of 2010.

The difference meant that British consumers were paying almost 6 per cent more in 2014 than four years ago. But crude prices in the two six-week periods were about the same.

Bosdet said one explanation could be that consumers lose out if crude prices rebound before the previous price decline reaches the retail level.

 

Refiners

 

European refiners have enjoyed slightly better margins since oil prices started tumbling. The refining margin in the Rotterdam hub was at $5.54 on Friday compared with $4.44 for the last 365 days, according to Reuters data.

But still, refiners' spot wholesale prices have fallen closely in line with crude prices.

"Hauliers tend to see the [wholesale] price fall by the next time they buy in bulk for delivery, while for consumers we often see a six-week lag before the price falls," said Nick Deal, logistics development manager at the Road Haulage Association.

Retailers blame the high prices on the level of taxes on fuel and the shrinking options for local supply as European refineries close.

"If you take what we've got from wholesale pricing... we're not far off keeping pace with crude oil pricing," said Brian Madderson, chairman of Britain's Petrol Retailers Association.  "There is a massive amount of fixed duty."

The AA comparison between retail and spot wholesale prices does not measure the margin of any one retailer, because each will have negotiated contracts to buy petrol for different time periods at different wholesale prices.

"I imagine that physical volumes throughout the supply chain are hedged to manage price risk," said Stephen George, chief economist at KBC Advanced Technologies. "It will take probably one to two weeks for the cheaper market prices to work their way through the system, but they will eventually."

How quickly retailers respond may come down to public pressure, George remarked.

"So when do they respond by letting the product's price drop? When the market drives them to do this. A few days, at least. Maybe a few weeks. A few extra quid in our pockets for Christmas," he added. 

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