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Determining Fuel Prices


Determining Fuel Prices

Consumers worldwide have watched the cost of motor fuels continue to fluctuate throughout the year. This raises the question, "Why do fuel prices rise and fall?"

In the long term, the greatest single factor influencing petroleum prices is the cost of crude oil. However, marketplace forces of supply, demand and competition can have a significant effect on the price of petroleum in the short term.

The Cost of Crude Oil

Crude oil prices have risen dramatically over the last few years, driven by strong global demand, limited spare oil production capacity, and continuing political instability in certain oil producing regions.

Since the price of crude oil has the most significant long-term impact on the average price of fuels, contributing to almost 50 percent of the retail price, it is not surprising to see average fuel prices significantly higher as well.

Increase in International Energy Demand

Surging crude oil demand is being fueled by strong economic growth, particularly in non-OECD nations. The U.S. Energy Information Administration projects that total world consumption of marketed energy is expected to increase by 44 percent from 2006 to 2030. Reduced spare oil production capacity leaves very little room to compensate for unanticipated supply disruptions or spikes in demand. The tenuous balance between supply and demand is even more of a concern when you consider that most of the world's oil is located in some of the more politically unstable parts of the world. As such, supply disruptions, whether real or perceived, can have dramatic effects on the price of crude oil.

Global economic expansion is driving what the U.S. International Energy Agency (IEA) says is the biggest increase in oil demand in 24 years. In particular, energy consumption in the emerging economies of non-OECD countries is expected to increase by 73 percent between 2006 and 2030. The driver behind the fast-paced growth in energy demand in these countries is strong long-term GDP growth.

Oil Supply – Uncertainty is Placing Pressure on Fuel Price

Crude oil is refined to produce petrol and diesel and the cost of crude oil is traditionally the greatest single factor affecting fuel prices over time. However, with the shortage of refineries to refine the crude, we are in a unique situation where the price difference between crude oil and refined product can be large.

Supply remains volatile. A number of other factors also increase uncertainty of supply and with rising demand, this is placing tremendous pressure on pricing. Political volatility in oil producing regions has historically impacted on crude oil prices and the political situation in the Middle East is of global concern.

Taxation

Taxes takes up a significant component of the price in a litre of fuel, but it varies from product to product, and country to country. Tax rates can be as high as almost half the cost of fuel in co