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Paul Mason's Idle Scrawl

£1 a litre - how much of that is political?

  • Paul Mason
  • 24 Apr 06, 01:08 PM

Petrol is already £1 a litre on some British forecourts and the average price could soon (today?) pass £1. Coming out of OPEC right now are various statements from oil ministers that they are not going to raise the 28 million barrels per day ceiling on production. They argue that it is not short supply but demand driven by political instability - notably America's refusal to take off the table the possibility of nuking Iran, Condoleeza Rice's statement that "self defence does not require a UN resolution" in this regard, and Iran's veiled warning that it will take the price a lot higher if sanctions are imposed...

So how much of that £1 is a political premium that we are paying for the Persian Gulf instability? The first thing to remember is that, in the UK, only 30p of the price is not tax.

If you look at the recent movement in crude oil prices you will see a jump on 29 March and a relentless upward surge ever since. Over the past year the price of Nymext light crude has peaked twice, at about 70 and 68 respectively: first in August and then in January 06.

Clearly the January 06 peak had a geopolitical element. There were fears then about both Iran and Nigeria. So if you say the price then was 68 and it is now 75 that gives you a starting point of 10% that is almost all down to the standoff with Iran. This itself has three components: the IAEA investigation into the Iran nuclear programme; the baseline position of the White House on military action; and Seymour Hersh's revelation that military action could include tactical nuclear warfare.

Last week President Ahmadinejad said oil prices had not yet reached their true value: when he said that the price was 71, now it is 75. Venezuela's president Hugo Chavez warned that the oil price would "rocket" if the USA attacks Iran.

If we translate these percentages into pennies: about 3p of that pound it cost you to put a litre of petrol in your car has been added because of the heightened threat of military action with Iran, and Iran and Venezula both making statements designed to drive the price up.

However the OPEC target price is still in theory $30. Even once you have stopped laughing at that, there must still be a fundamental rather than a political explanation for the bulk of the difference between $30 and $75.

The Centre for Global Enegy Studies confirms this in its monthly survey out today:
- refinery capacity is very limited - not just because of Katrina's aftermath but current refits in teh refinery sector in the US, which is switching over to lower-sulphur gasoline.
- the move to lower sulphur is hiking the demand for "sweeter" oil
- a lot of this stuff comes from the Niger Delta, which is still seething so much that even the few journalists willing to go there find it hard to get permission to do so independently from the government
- the OECD countries are holding 4bn barrels of oil as stock - about half of that is held by governments. That could replace 18 months worth of Iranian oil in the market.
- Iraq, of course, is producing at much less than its OPEC quota, as its infrastructure has still not recovered from the war

Basically, when oil was 62 dollars a barrel, a couple of months ago, petrol in the UK was 90p a litre or less. It is hard to be scientific about the relationship of crude prices to petrol prices. But one exists - and I reckon about 3p of that 10p rise is down to Iran vs USA war of words; maybe 1p down to Nigeria; maybe throw in another 1p for good measure; the rest - at least half - is probably down to specualtion by hedge funds and supply problems in the refinery system. As to profiteering by the oil companies, it is as always hotly refuted and denied.

My question to you is this: how mad are you getting about £1 a litre and is it affecting your spending habits - or are the economists right and it really will only matter in the long term, when as Keynes said, we are all dead (hopefully of natural causes)?

Comments  Post your comment

  • 1.
  • At 02:47 PM on 24 Apr 2006,
  • Candadai Tirumalai wrote:

I have not driven for twenty years--a voluntary choice-- and so I am not directly affected. But in the United States, gas(as it is called here) is three dollars a gallon, and complaints from aggrieved citizens are much in the air. But my hope is that people will turn away from gas-guzzlers(no clear sign of that yet), that alternative sources of fuel will be explored more imaginatively(America has a distinguished history of practical invention), and that people will recognize that feet are made not just for the accelerator pedal but for walking.

  • 2.
  • At 07:00 PM on 25 Apr 2006,
  • A Shaw wrote:

I think it is about time that the Government of this country (any, they are all guilty) stops making as much money as possible out of the motorist. The tax on fuel is bordering on criminal and something should be done to let them know that we the buying public have had it with their profiteering and make prices more realistic to the cost.

  • 3.
  • At 07:26 PM on 25 Apr 2006,
  • David B wrote:

We can do a few more calculations based on what you have provided.

30p of our petrol cost per litre is not tax. Taxes have not changed in the last couple of months. So, we are being hit with a 33% increase in the amount taken by the oil companies at the petrol pump.

Crude oil prices have gone up from $62 to $75 a barrel, only a 17% rise. It is reasonable to assume that retail, processing, and management costs have not changed. So, where is this additional 16% hike coming from?

The answer is, oil companies are making huge profits, hiding behind headlines of record crude prices as an excuse for fleecing us at the pumps.

  • 4.
  • At 07:56 PM on 25 Apr 2006,
  • David B wrote:

We can do a few more calculations based on what you have provided.

30p of our petrol cost per litre is not tax. Taxes have not changed in the last couple of months. So, we are being hit with a 33% increase in the amount taken by the oil companies at the petrol pump.

Crude oil prices have gone up from $62 to $75 a barrel, only a 17% rise. It is reasonable to assume that retail, processing, and management costs have not changed. So, where is this additional 16% hike coming from?

The answer is, oil companies are making huge profits, hiding behind headlines of record crude prices as an excuse for fleecing us at the pumps.

  • 5.
  • At 09:43 PM on 25 Apr 2006,
  • kim wrote:

But please don't blame the hedge funds !

If you want to manipulate the price of oil, you have to buy the oil, not some paper contract.

Then you have to put it somewhere.

At USD 75, you're not going to make any money after storage. Or do these "masters of the universe" have such big living rooms that they can store a few tankers in the corner......

Only Governments have any amount of storage, and they include the producers (for whom storage equates to leaving it in the ground).

My guess is that (per barrel) US$ 10 -15 for Iran/Nigeria.

kim

  • 6.
  • At 10:49 PM on 25 Apr 2006,
  • MikeS wrote:

The Politics - our own Chancellor has surely scored a spectacular own goal last November by doubling the tax on oil extraction from the North Sea. What happens? Companies move elsewhere; stop exploring in UK waters, oh, and when it is cold we have no gas to heat our homes at sensible prices.

Taxes - every increase in the base cost of petrol from the refinery is caught by two taxes a) fuel duty b) VAT on the fuel AND VAT on the duty.

So it is incorrect to say their is no political impact on price rises - it is built in to the pricing mechanism we all suffer.

  • 7.
  • At 10:52 PM on 25 Apr 2006,
  • MikeS wrote:

The Politics - our own Chancellor has surely scored a spectacular own goal last November by doubling the tax on oil extraction from the North Sea. What happens? Companies move elsewhere; stop exploring in UK waters, oh, and when it is cold we have no gas to heat our homes at sensible prices.

Taxes - every increase in the base cost of petrol from the refinery is caught by two taxes a) fuel duty b) VAT on the fuel AND VAT on the duty.

So it is incorrect to say their is no political impact on price rises - it is built in to the pricing mechanism we all suffer.

  • 8.
  • At 03:36 PM on 26 Apr 2006,
  • neil wrote:

In asking the question 'how mad are you getting' could be extended to ask 'how mad are you getting to actually do something about it?' And if that is the question then what can you do about it. The answer is sadly very little as many of us still have to drive to work and goods still have to be delivered so there is little alternative...or is there?

I was researching biodiesel the other day with a view to buy a diesel car which can run on biodiesel (as all diesel cars can) and there was no forecourt in Scotland, where I live, to buy it from despite a growing number of plants. This fuel performs as well as standard diesel, has lower emissions and isn't affected by Hurrianes in the U.S. and Mr Bush's sabre-rattling with Iran.

Is it perhaps that there is still too much money to be made by governments and mighty multinational oil companies (who spend millions lobbying government)to actually do something about it?

I didn't realise the full extent of how much politics affected the price of oil until reading this. I also agree with David B about the oil companies getting richer of headlines and political instability.

  • 10.
  • At 03:01 PM on 09 May 2007,
  • Simon Parker wrote:

The reason for the iniquitous price of fuel in the UK over the past 30 years is mainly down to tax, and the government's reliance on that revenue.

In 2004, the tax collected from fuel duty was 42 billion pounds. Only 7 billion of that was spent on transport. Where did the rest go? Since the mid '70s, we have been told that the tax would remain high, but that it would be used to finance a public transport system that would give everyone in the UK a real option to private car use. In the 1980s for example, we were told that "Britain would have a train system to rival France's TGV in 20 years time". Well, 20 years is now and all we have is an expensive, fragmented, rail network run by and for big business.

The bottom line is that we spent the money in taxes in good faith expecting the provision of a service which hasn't been forthcoming. Either we want our money back or we want the fuel tax level to revert to the actual level spent on transport (i.e. 1/7 of the current level) until such time as the debt is repaid.

It is interesting to think forward to the future. As oil supply reduces clearly prices will rise significantly - not bcause of political issues or tax but more due to supply /demand issues. So the oil companies will end up actually handling less product but earning more per barrell. It sounds to me as if the oil businness has a rosy future even as the supplies run out.

  • 12.
  • At 03:18 PM on 10 May 2007,
  • Heather wrote:

I live in Inverness in the Highlands. My question is simple. Can anybody tell me why Tesco are charging 96.9 for unleaded petrol, when we live in a city where BP operate a terminal? I would also like to ask why Tesco petrol is cheaper in Elgin when the petrol is taken direct from Inverness Terminal to Elgin by road. The price of petrol is slowly creeping up again. Is it a case of let's see how far we can put the price up before the public notice and start to complain.

  • 13.
  • At 03:58 AM on 11 May 2007,
  • Lionel Tiger wrote:

As a substance with nasty carcinogenic substances in it, Petrol has become the fag of the 21st century. With the decline of cigarette consumption, and the banning of smoking in public places, a substitute has to be found to balance the books. I fear petrol is being sought to become this revenue supply. How can this be avoided without decent public transport ? It'll be another fuel protest, not unlike the Boston Tea Party or Mahatma Gandhi. Once oil prices subside, corn will once again be stuck in the teeth of pick-up truck driving dungareed Americans. They might even export grasses fermented into industrial alcohols to us to use as biofuels, as directed by European parliament.

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