Price of Petrol (some analysis)

Submitted: Tuesday, Sep 13, 2005 at 09:56

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Member - Norm C (QLD)

Here is some very rudimentary analysis of the effect of the price of oil (known as POO in the financial markets) on the pump price of petrol. Base data sourced from various web sites. Calculations are my own.

A barrel of oil contains 42 US gals (160 Lt)
The production from a barrel varies slightly depending on the type of oil and where refining is done, but the following is typical:

74 Lt petrol
35 Lt diesel
15.5 Lt jet fuel
41.5 Lt other products (kerosene, lubricants. asphalt, liquified gas, etc)
Total output (166 Lt) is a little higher than input (160 Lt) due to the addition of small amounts of various chemicals during production stages.

Lets assume that the only thing to vary over a period of time is the POO. All other production costs remain unchanged.

44.5% of output is petrol
21.1 % of output is diesel

For each $10 increase in the price POO, $4.45 should flow through to petrol, with 6 cents attributed to each Lt of petrol produced

For each $10 increase in the POO, $2.11 should flow through to diesel, with 6 cents 6 cents attributed to each Lt of diesel produced.

Over the last year or so, crude oil has increased in price by about $30 (from $30 - $35 up to $60 - $65).

So over that time, any increase in the retail price of petrol and diesel above 18 cents is the result of something other than the price of oil. Without research, my guess is that the retail price has gone up by 30 to 40 cents in that time. Why the difference?

The biggest factor would be tax (the higher the oil price, the greater the tax take; hence the governments reluctance to take any action). Not sure at the moment how much this would be per Lt.

Another factor would be distribution costs (driven up by the price of petrol and diesel). This should not be more than 1 cent per Lt.

By my reckoning, pretty much everything else would be increased profits in the supply chain; oil companies, wholesalers (where they exist) and retailers.

My only conclusion is that only about half (perhaps less) of the increase in the retail price of fuel can be directly attributed to the price of oil. The rest is other factors, including tax and probably increased profits.

Make your own conclusion, but that is mine.

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Reply By: angler - Tuesday, Sep 13, 2005 at 10:37

Tuesday, Sep 13, 2005 at 10:37

Very good analysis, Seems fairly correct, The excise on fuel does not change now only the double dip tax, GST.

If the average pollie had to buy their own fuel maybe we would see some minor changes. Since they will never ever have to purchase fuel then thats also irrelevant.

Thats just leaves the oil companies. Recent letter to the editor from a console operator in Townsville (todays bulletin) "we are told what to charge from Sydney so don't blame us" (approx wording)

AnswerID: 129843

Reply By: Willem - Tuesday, Sep 13, 2005 at 10:47

Tuesday, Sep 13, 2005 at 10:47

I think that the Fed Gov fuel excise is 38% and then there is the 10% GST on top of the retail price.

As seen on TV a few days ago

64 cents production cost

25 cents Oil producers profit margin

51 cents Gov taxes

Total $1.40 for unleaded petrol

We who live in the country and outback pay a higher price due to transport costs

AnswerID: 129845

Reply By: Alan Southport QLD - Tuesday, Sep 13, 2005 at 10:57

Tuesday, Sep 13, 2005 at 10:57

I thought that the government was capped to 38cents per litre?

But the GST increases as the cost of fuel goes up - and since we all Labour State governments - and ALL THE GST GOES TO THEM [none the federal government], I haven't seen any of the premiers complaining!!!!
Have you?

But agreed that the poo has gone up, why so much since we don't import any oil from the USA (not to my knowledge anyway), and that the USA uses about 1million barrels a day and it has just recently opened up it's 700million barrel reserves to put back into it's own market 2million barrels per day.

It's said that the USA is buying as much as it can to catch up with the loss of supply from it's south coast, which is why it's up in price.

There is a glut of oil in the world - OPEC - should be the ones being asked????

There's my tuppence.

but as long as we continue to use Petol and Diesel - these issues will always be with us. So like the weather, why keep worrying about it, when there is very little we can do.

AnswerID: 129846

Follow Up By: Nudenut - Tuesday, Sep 13, 2005 at 11:47

Tuesday, Sep 13, 2005 at 11:47

Capped at 38c...are you sure....dont tell em if is !!!

FollowupID: 384281

Follow Up By: Member - Blue (VIC) - Tuesday, Sep 13, 2005 at 15:57

Tuesday, Sep 13, 2005 at 15:57

Yep, capped at 38c... The Great Johhny Howard made mention of that on national TV, throwing back to the states to maybe look at a GST realignment to ease the pain. So far I haven't heard Bracksy mention it though.

FollowupID: 384336

Reply By: robak (QLD) - Tuesday, Sep 13, 2005 at 11:19

Tuesday, Sep 13, 2005 at 11:19

Hi Norm,

Interesting thought.
You're assuming that they (the refineries) should keep the same profit per litre of fuel produced. I think it may have more to do with the return on their (refinery's) investment.

What you're saying (correct me if I'm wrong) is that basically:
If each litre of fuel previously cost them (ie) 50 cents to make, and they wanted a 10 cents profit, they would sell at 60 cents. Now with the price of crude going up and it costs them say, $1.20 to produce, with the 10 cent profit, it should cost $1.30 per litre. Right?
The flaw in this is that they would essentially be making a smaller profit on the money they invested.

If they're looking to get a 20% return. Then for every $100 spent on crude oil, they want to make $20 profit no matter the amount of crude oil bought or of litres of fuel produced.

Previously, when oil cost $30 a barrel, for $100 they got 3.3 barrels or 528 litres. Now, with oil at $60 a barrel, they get only 1.6 barrels or 256 litres. So out of that 256 litres they have to make the same profit as previously they made on 528 litres. ie $20.

The amount of oil they buy for $100 is irrelevant. They need to make that 20% profit. If they let their return be reduced, they would be better off investing that money in other ways, such as a bank which would give at least a 6% return.

Natually they'd be a lot more variables but it's just something to think about. What do you think?

R

AnswerID: 129851

Follow Up By: Member - Wim (Qld) - Tuesday, Sep 13, 2005 at 12:13

Tuesday, Sep 13, 2005 at 12:13

robak

A rather enlightened view.

Regards

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FollowupID: 384287

Follow Up By: Member - Norm C (QLD) - Tuesday, Sep 13, 2005 at 12:25

Tuesday, Sep 13, 2005 at 12:25

Hi robark,
I deliberately kept it simple. Regardless of the reason for the increased profit to oil companies (retaining their % margin or profiteering), I was simply seeking to show that, at best, only half the increase in the retail price is DIRECTLY attributable to the higher POO.

Everything else is for some other reason, regardless of what the oil companies and the govt have to say. Both are benificiaries (and pretty much the only ones) of the higher prices.

FollowupID: 384291

Follow Up By: Member - David 0- Tuesday, Sep 13, 2005 at 14:31

Tuesday, Sep 13, 2005 at 14:31

Robak has it pretty well right

Additionally you ignored supply and demand. Huge demad for diesel and to a lesser extent in China is raising the refined fuel cost (not the POO). Our fuel costs correlate directly with the refined fuel price ex Singapore.

Loss of refining capacity in the wake of Katrina is affecting that price.

FollowupID: 384322

Follow Up By: Member - Norm C (QLD) - Tuesday, Sep 13, 2005 at 14:59

Tuesday, Sep 13, 2005 at 14:59

David O, supply and demand may well effect the price. But it does not effect the cost of production. Which still leaves the increase not attributable to POO in the pocket of the oil companies (and the government).

I have shares in a number of oil companies, so I'm not complaining from that perspective.

As I said, it was rudimentary analysis to show that only part (possibly less than 50%) of the price increase is DIRECTLY attributable to increase in POO.

Also, a doubling in the cost of a key business input (crude oil in this case), generally should not lead directly to a big increase in company profits (ie maintenance of % margin on sales as suggested by robark). Very few companies and industries have this luxury. It is only enormous market power and a lack of genuine competition that allows this to happen.

Most Australian businesses (banks aside) particularly small and medium businesses, suffer profit reductions, not increases when their business input costs increase.

FollowupID: 384328

Follow Up By: Member - David 0- Tuesday, Sep 13, 2005 at 16:18

Tuesday, Sep 13, 2005 at 16:18

Norm

I couldn't find fault with your rudimentary analysis, just wanted to say it isn't the whole picture. I am as angry about the cost of fuel as anyone.

Maintenence of percent margin has been the catch cry of EVERY business I ever worked for. Though I have never worked for a small business, maybe thats why so many go broke.

Cheers
David O

FollowupID: 384339

Reply By: Tim HJ61 (WA) - Tuesday, Sep 13, 2005 at 11:38

Tuesday, Sep 13, 2005 at 11:38

Not only does the Government sit on it’s hands with pricing, they’re stifling any expansion of alternative fuels. Lets not forget fossil fuels are running out and will always get more expensive.

We talk about biodiesel here from time to time. The biofuels industry, in a similar way to the renewable energy industry, is crying out for greater Government support, but again and again we see fossil fuels as the only fuel source getting a mention. Australia is already well behind the eight-ball on incentives to displace oil. Other countries have mandated ethanol blends, resisted taxing biofuels and gas, and provided incentives for fuel efficient vehicles.

The cap on the level of ethanol in fuel means Australia is unable to open up the biofuels market, lessen the impact of inevitable oil price rises, reduce dependence on fossil fuels and improve incomes for cane farmers.

The Government should also be looking at measures such as switching 25% of transport to biofuel and gas by 2010 to head off the explosion in greenhouse emissions from the anticipated doubling of the freight load over the next 20 years.

The more quickly the Federal Government moves to provide support for the growth of the biofuel industry, the sooner we can benefit from cheaper and cleaner, fuels.

Tim

AnswerID: 129856

Follow Up By: Member - Hugh (WA) - Tuesday, Sep 13, 2005 at 14:27

Tuesday, Sep 13, 2005 at 14:27

Tim,

What cap on ethanol content do you consider is appropriate and how does the current limit of 10% stifle the overall biofuels market?
Hugh

FollowupID: 384321

Follow Up By: Tim HJ61 (WA) - Tuesday, Sep 13, 2005 at 16:38

Tuesday, Sep 13, 2005 at 16:38

Hi Hugh,

I understand there are vehicles sold overseas that handle 85% ethanol so I'd guess that'd be a good marker.

Where things get more complex are proportions of blends of any biofuel that vehicles can handle, some might be able to handle more, others less. I can imagine the complexity of a refueling station with many choices. We already have diesel, unleaded, premium, LPG at pump stations. Maybe we could go back to those old 'dial your mix' bowsers that BP used to have!, so people could choose their mix depending on their vehicle type.

How does the limit stifle the biofuel market? Level of demand, critical mass of demand. Developing new technology and infiltrating traditional markets takes courage, time and money. The bigger issue to me is the lack of leadership on developing alternatives to fossil fuels. There's only one hybrid car in the parliamentary carpark in Canberra (Lyn Allison's) the rest are all high fuel users.

Tim

FollowupID: 384344

Follow Up By: Member - Hugh (WA) - Wednesday, Sep 14, 2005 at 15:17

Wednesday, Sep 14, 2005 at 15:17

Hi Tim,

You're right that some markets use E85, however there are real issues when running in between E10 and E85. This has a lot to do with the water absorption characteristics of ethanol blended fuels, leading to corrosion issues when running in between.

We've recently done a lot of work for the government on Ethanol blended fuels. You find a lot of this reported via Dept of Environment and Heritage, via attached link. Hopefully you may find this site a useful resource, as it appears you have more than an average interest in the topic.
DEH Ethanol Info

Regards,
Hugh

FollowupID: 384533

Follow Up By: Tim HJ61 (WA) - Wednesday, Sep 14, 2005 at 16:06

Wednesday, Sep 14, 2005 at 16:06

Thanks Hugh,

That's a terrifically detailed report - who'd buy a WRX eh!

Do you know how other countries have overcome the problems of E20 with emissions and wear as identified in the report? or are they not high enough to warrant any changes?

Tim

FollowupID: 384539

Follow Up By: Member - Hugh (WA) - Thursday, Sep 15, 2005 at 14:29

Thursday, Sep 15, 2005 at 14:29

Tim,

I don't recollect exact ethanol blend being run in Brazil, though higher than E10. I know from contacts within Siemens VDO and Delphi that signiifcant changes had to be made to fuel pumps, hosing, filters, etc for this market.

Hugh

FollowupID: 384703

Reply By: GaryInOz (Vic) - Tuesday, Sep 13, 2005 at 15:03

Tuesday, Sep 13, 2005 at 15:03

The POO stinks, I reckon.....

AnswerID: 129886

Reply By: lindsay - Wednesday, Sep 14, 2005 at 08:20

Wednesday, Sep 14, 2005 at 08:20

For every 1 cent that fuel fuel G.S.T. goes up the Victorian State Govt. gets $40 million dollars extra every year.

AnswerID: 130005

Follow Up By: Member - Bill S (NSW) - Wednesday, Sep 14, 2005 at 19:15

Wednesday, Sep 14, 2005 at 19:15

If you can save a litre plus of fuel for every 100l;ms you drive whoes budget is affected,whoes getting the raw prawn and who is winning?????? Not hard to fathom is it.

Regards BILLS

FollowupID: 384571