Petrol price rip-off as cost of crude falls

Over the last six months the cost of crude oil has fallen by 47 percent. As you can see from the NASDAQ chart (at right) crude has fallen from an average of around US$95 a barrel back in September 2014 down to US$50 a barrel.

Here in Australia we were paying AU$1.50 a litre (i.e., AU$5.68 per US gallon) for standard unleaded when the price of crude was up around the US$95 a barrel price. So, with a 47 percent drop in the price of crude you could expect that the pump price of standard unleaded would drop to around AU$0.80 a litre.

But the pump price is nowhere near this. It has fallen but the average price of standard unleaded is hovering around AU$1.20 (i.e., AU$4.54 per US gallon). This works out to only a 20 percent reduction in price—or about half the actual price drop of crude.

Oh! Hang on. I know what I've missed. It's the exchange rate. Because the Aussie dollar is down at 78 cents. So if we adjust the cost per barrel up by 28 percent to factor in the exchange rate drop since last September then that would make the effective cost of a barrel of crude for Australian consumption around AU$64 per barrel as opposed to $50. So the drop in the price of crude to Australia is more like 33 percent (and not 47 percent).

But even so, if you take the pre-crude oil price fall price of AU$1.50 and reduce it by 33 percent you get AU$0.99 and not AU$1.20.

Based on this, oil companies selling petrol in Australia are making at least 20 cents per litre more today than they were back in September by not passing on the full benefit of the falling crude prices.

I realise that the oil companies have buffer stocks of oil and that they don't get the full benefit of the lower crude costs until the buffer stocks are consumed. But, as I understand it, Australia only ever has about 11 days of buffer stocks of fuel and it is well over 11 days since the price of crude hit $50 a barrel.

So one can only assume that the oil companies are making an extra 20 cents per litre profit on top of their 'normal' per litre margin.

Barry.