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What in the World is going on with Oil Prices?

November 16, 2015 Money Matters, Utilites No Comments
oil

What in the World is going on with Oil Prices?

February 2015

This week, the price of Brent crude oil fell to its lowest level in six years with the price of a barrel of Bent crude decreasing by 55% from $105 in June 2014 to $47 now.

So why has the price of oil fallen? There are principally 3 main reasons;
Firstly, America has become the world’s largest oil producer through ‘fracking’, the process of fracking is the practice of injecting water, sand and chemicals deep underground at high pressure to extract crude oil and natural gas from dense rock formations. Though the USA does not export crude oil, it now imports much less, creating a lot of spare supply.

Secondly, demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels.

Third the Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. Both The Russia and Iran are also large oil producers, but their costs of production is far higher than Saudi Arabia. So by driving the oil price low means that Russia and Iran (as well as other countries) will suffer a loss for every barrel of oil they extract and refine. Saudi Arabia could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves and its own oil costs very little (around $5-6 per barrel) to get out of the ground compared to around $70 a barrel in Russia for example. 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.

Whilst crude oil prices are coming down, we are not seeing the same proportionate falls at the pumps and this is causing concern amongst both Governments and motoring organisations. Whilst oil prices have come down by 55% in the past 7 months, the price of unleaded and diesel in Jersey has reduced by only 16%, but the fall in heating oil has been more commensurate, falling by over 30%. This is the so-called ‘rocket and feather’ effect. When oil prices rise, pump prices increase like a rocket, but when they fall, the decline is much slower, like a falling feather.

Clearly there is a discrepancy somewhere, which needs further explanation. Part of the reason is that fuel duty and GST make up half of the price and the cost of the fuel makes up the other half. But within the cost of product, there are shipping and storage costs to take into account. The other reason is the fact that crude oil prices are priced in dollars and sterling has declined against the dollar over the period and thus the effect of the falling global oil price has been diluted in Britain by a weakening of the pound from $1.71 in July to $1.59. Then there is the variation between Jersey’s and the UK’s pre-tax and pre-duty fuel prices which has widened from 18ppl in 2011 to 24ppl in 2014 (according to the JEP on 16th Jan 15), which prompted Jersey’s Assistant Chief Minister requested the Channel Islands Competition Authority to conduct a study into the matter. The Jersey Consumer Council welcomes this study at least if nothing else, it helps us better understand how pump prices are calculated, foster transparency and assist in determining whether or not the oil companies are passing on the entire savings, so that we can be assured we are paying the lowest possible prices.


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