With prices of crude oil in almost free fall on international markets, it is natural for car users to ask why pump prices aren’t falling as fast as the price of crude oil. There are a few reasons. There’s wide agreement that hedging is one of them, but it’s by no means the only reason.
Hedging would explain the lag in the price drop at the pump. The fuel you buy today was made with crude oil bought when prices were higher. So it takes a while for lower prices to move through the supply chain, though it would certainly help if the supplier (Enemalta) or the regulator (Malta Resources Authority) were in a position to provide information on the timing of this pass-through of crude oil prices.
One also needs to understand that the prices of crude oil and pump prices don’t necessarily move in tandem because different market conditions apply to crude and pump fuel.
Whereas crude prices are affected by supply and demand conditions, together with geo-political motives, the prices at fuel stations are set by the sole provider of fuel, Enemalta. Hedging or no hedging, there’s no competition to cut prices, and profit margins – besides other consider-ations – weigh heavily on the minds of authorities.
The first consideration is the commission earned by fuel stations on sales of fuel based on contractual arrangements. There’s no way fuel stations would accept contractual revisions to their commissions to accommodate lower pump prices.
Secondly, when you fill your tank, you’re paying for more than just the cost of the fuel. We pay VAT and excise duty. So when fuel prices rise, you pay extra for it but when they fall, you still pay the full tax, which is levied per litre rather than per euro. So taxes tend to skew the ratio between the price of petrol or diesel and crude oil. That’s another reason why, despite a 40 per cent drop in crude prices since June, pump prices have fallen by a much smaller percentage.
When you fill your tank, you’re paying for more than just the cost of the fuel. We pay VAT and excise duty
The strength of the dollar hasn’t helped, either. A stronger dollar against the euro means Enemalta has to pay more for its supplies. One also needs to factor in the cost of refinery, delivery and distribution in the final price at the pump, and the extent of this cost can only be provided by Enemalta or the Malta Resources Authority.
All the foregoing helps to explain the gap between crude and pump prices, but there is no doubt that political pressure for lower prices at the pump is mounting. According to recent European Commission figures, the gap appears to be still wide, and price reductions for consumers in many EU economies amount to less than half the fall in wholesale refined fuel prices, even when taxes and exchange rate moves are accounted for.
In the UK, petrol prices at petrol stations fell by just over six per cent between June and December. When the tax component is taken out of the equation, the reduction amounts to around 14 per cent. That’s nowhere near the 40 per cent reduction in the spot wholesale price.
Of course, the situation is very different in UK where supply of fuel is procured by more than one supplier, unlike Malta. Whereas the UK finance minister can be bold enough to state his government would be watching (oil companies) carefully to see whether consumers will be paying lower prices, the same cannot be said in Malta with oil being procured by a public entity.
However, what the government could do is to disclose, within reason, information on how the final price at the pump is arrived at. That would help to defuse the mounting pressure to reduce prices.
In the UK it is very difficult to establish who in the distribution chain has an interest in not passing on lower prices to consumers. There is no such issue in the case of Malta, with Enemalta being the sole supplier. Our situation is very unique because of this fact, and transparency in how pump prices are determined is vital for consumers and constituted bodies alike.
Philip von Brockdorff is the head of the Department of Economics at the University of Malta.