Finance

2 euros for a liter of petrol expensive? That’s actually quite alright

The suggested retail price for a liter of Euro95, according to consumer collective UnitedConsumers, which monitors fuel prices, is 1,989 euros. That is therefore only slightly below the psychological limit of 2 euros.

In some places, such as along the highway, you even already pay 2 euros per liter.

If the oil price continues to rise, the suggested retail price for euro95 can be expected to rise above 2 euros. “Every dollar added to the price of oil roughly translates to an increase in the price of gasoline by one cent,” said Paul van Selms, president of United Consumers. Of course it also depends on the dollar exchange rate, because the oil price is in dollars.

Cars much more economical

Are people not deterred by the psychological limit of 2 euros for a liter of Euro95? “They still have to go to work,” says Van Selms.

The price of petrol has increased only slightly in recent decades, if you adjust for inflation. (see chart above).

In addition, cars have become considerably more fuel-efficient. For example, according to data from Bovag and Rai Association, the average fuel consumption of the 50 most sold petrol cars since 1980 has fallen from more than 8 liters per 100 kilometers to more than 4.5 liters.

In other words: three decades ago an average petrol car with a liter of petrol would have traveled less than 12 kilometers, now that is more than 21 kilometres.

More expensive along the highway

The suggested retail price that United Consumers publishes is, as the name suggests, only advice from oil companies. In recent years, the margin for gas station owners has been increased, so that they can give more discounts and still make a profit, says Van Selms.

“As a result, the price that you actually pay, compared to the recommended retail price, is often lower than it used to be. This is less the case on highways, because gas stations often have higher costs there. Furthermore, many motorists do not leave the highway to to look for a gas station, because that takes time, and for lease drivers it often doesn’t matter what the price is because their boss pays,” explains van Selms.

Oil price has doubled

The oil price has risen sharply in the past year. A year ago, the price for the leading Brent oil, which is used as a reference point in Europe, among others, was only about 42 dollars and now it is almost double. This is because the economy is recovering after corona and the demand for oil and petrol is therefore increasing.

Another factor is that last year the association of oil-producing countries OPEC, plus Russia, decided to start producing less oil. During the corona pandemic, the oil price had fallen sharply and if you pump up and sell oil, you actually benefit from a higher price.

‘Oil price continues to rise’

The big question is, of course, whether the oil price will rise further. In any case, the major American investment bank Goldman Sachs has raised the forecast for the oil price at the end of this year from 80 to 90 dollars a barrel.

“We will have to learn to live with a high oil price. In principle there is enough oil, but it is becoming more and more expensive to extract it from the ground, because some of the easily extracted fields have already been pumped out,” says Van Selms.

Are oil companies going to pump up more?

Still, the question is whether it pays to put more fields into production, says energy analyst Jilles van den Beukel. In principle, shale oil producers in the US can increase their production quite quickly. If you drill a well, you can start producing within six months, says Van den Beukel.

But a few years ago they were too enthusiastic about increasing their production and when the oil price fell sharply in the spring of 2020 and even became negative for a while, they ran into serious problems. As a result, investors are now putting pressure on shale oil producers to increase production more slowly, says van den Beukel.

Energy transition

In addition, the large oil companies, such as Shell and ExxonMobil, are also taking it a bit easier with their investments, he continues. For them it takes a little longer before a production location actually produces oil. They invest for a period of 10 to 20 years, because that is how long an oil field developed according to the traditional method can often yield oil.

The energy transition will depress demand in the somewhat longer term, making it less attractive to invest a lot of money in new oil wells now. In addition, there is pressure from shareholders, such as pension funds, to pay less attention to fossil fuels and more to alternative fuels, says Van den Beukel.

Opec and Russia

Still, he doesn’t think the oil price will rise much. “It stands or falls with what OPEC and Russia will do. You can ask yourself whether they have much interest in letting the oil price really rise very far.”

“It often takes a while before OPEC and Russia start doing something, the need for this is less necessary with high oil prices than with low oil prices,” adds Van Selms.

“But of course they don’t want a high oil price to stimulate the demand for alternative fuels, he says. He thinks the oil price can rise a little further, to $83 or $84 a barrel.

The oil price only partly determines the price of petrol. The price of a liter of petrol is 41 percent excise duty and another 17 percent VAT. Only 33 percent is determined by production costs.

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