How low will petrol prices fall?

As crude oil prices continue to fall, consumers are making the most of the lowest petrol prices in six years.

Tesco, Morrisons, Sainsbury’s and Asda have all slashed the price of petrol and diesel at the pump, with a garage in Birmingham being the first to break the magical £1 a litre mark.

How much further can we expect prices to fall?

Simon Williams of RAC had this to say:

The decision of three forecourts in the West Midlands to sell petrol for under £1 a litre – last seen in 2009 – is clearly having a ripple effect on the supermarkets as they are continuing to bring their prices lower still.

With a barrel of oil now costing around $47, we are surely only weeks away from the milestone price of £1 a litre being a common sight at petrol stations up and down the country.

This will also have a very positive effect on reducing the average price of both petrol and diesel for motorists everywhere.

And, as the current oversupply of oil is believed to be part of a long-term Opec strategy to keep oil prices low, there is every reason to think that motorists may well enjoy low prices for some time to come.

However, we are now getting to a point where the share that the Treasury takes from the forecourt price is nearing 75%, which is a bitter pill for motorists and retailers.

We should perhaps be seeking a commitment from all the major political parties that they will not look to increase fuel duty in the next parliament.

Quentin Wilson, motoring journalist and lead campaigner for Fair Fuel UK

I think some of the investment banks, such as Goldman Sachs, are saying that oil is likely to drop to $40 a barrel this year. We’re getting to 99p a litre at some petrol stations now.

You could say petrol prices might drop to 85p if retailers react to oil prices.

Oil has reduced in price by 58% since June, yet petrol has only gone down 50% – clearly someone in the value chain is making a profit.

There’s pressure from me with my Fair Fuel UK campaign, and George Osborne, to lower petrol prices.

It’s a classic example of the rocket and feather effect. When oil prices go up, retailers and suppliers are quick to respond and prices at the pumps rocket the next day. But when oil prices go down, petrol prices fall as slow as a feather.

Petrol retailers blame the cost of refining and so on, but it doesn’t have to be like this. In France, for example, the price of petrol varies daily.

Consumers here are being disadvantaged, someone in the chain is hanging on the profit.

David Hunter, Schneider Electric energy management specialists

If oil prices fall to $40 a barrel, then a litre could fall to £1, based on the exchange rate staying stable, though there would be a delay on that feeding through to price at the pump.

Less than that would be unsustainable because of tax take, extraction and manufacture costs.

As the price [of oil] falls, the tax and duty proportion of the pump price rises as fuel duty is unchanged.

So in July the tax/duty mix accounted for around 60% of the total forecourt price. Now it’s knocking on the door of 70%. The pound has fallen by around 12% against the dollar since the mid-July oil price peak.

So we need to compare the sterling value of Brent with the price at the pumps, as this exchange rate weakness has acted as a brake on price falls to date.

Other costs such as transport, supply costs and retail margin may vary but won’t fall by anywhere near the same degree as the commodity.

There is a time delay between movements in the unrefined crude oil market and filtering through to the pumps. The crude oil has to be sold, transported to refinery, refined and distributed to the retailer before the price effect can be seen.

The refined fuel price can also de-couple from the price of Brent crude oil due to other factors.

For instance, high levels of refinery-finished product stocks would delay the fall in the crude oil price making its way to the pump, and also demand constraints or maintenance outages at refineries.

The Procurement Group

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