The steep drop in crude oil prices between March and April came as nations representing the bulk of demand went into lockdown, bringing industrial production to a near-halt and driving road traffic down to levels not seen in decades.

Passenger car traffic in the UK dropped like a stone, falling by two-thirds from normal levels in April, while light commercial traffic dropped around 60% and heavy goods traffic fell nearly 40% as distribution systems struggled to maintain supplies.

Oil prices also went into free-fall as lockdown started, with front-month Brent dropping from $50/barrel on March 5 to a low of $19.33 on April 21.

More recently however, UK road use has increased to around 60% of normal pre-Covid levels for cars, more than 70% for light commercial and more than 80% for heavy goods vehicles, according to UK government data.

This recovery has been mirrored in other countries as well and as if in sympathy, oil prices have climbed to the point where they are now just 20% below their pre-Covid levels.

It’s a common complaint among drivers that gasoline prices are very quick to reflect an increase in oil prices, but far too slow to respond when crude falls. And with crude having dropped by more than 50% in April, drivers might be forgiven for having expected a significant fall in retail gasoline prices.

We’ve decided to look at this complaint in light of the recent collapse in oil prices. We’ll compare prices in the US as well as three European countries: the Netherlands, which has the highest fuel duties according to the European Environment Agency (EEA), Lithuania, which has one of the lowest, and the UK.

CHART 1 – Gross fuel prices index

Source: Automobile Association UK, ICE Futures, fuel duty data from European Environment Agency, US data from various sources

All European gasoline retail prices include both a national fuel duty and value-added tax (VAT). Fuel duty is normally a fixed amount per liter, while VAT is assessed as a percentage of the net total.

The Netherlands levies a duty of nearly €0.79/liter on gasoline, while Lithuania’s government takes less than €0.44/liter. The UK comes in at the higher end of the scale at around €0.65/liter, according to the EEA data.

In the US, gasoline is subject to a federal tax of 18.4 cents/gallon, while every state also levies its own fuel and sales taxes; these range from 14.66 cents/gallon in Alaska to 61.2 cents/gallon in California. We’ve applied a mean of 31.3 cents/gallon for our calculations.

The VAT on fuels varies across EU countries, but in the cases we’re examining, the rate is 21% in both the Netherlands and Lithuania, and 20% in the UK.

Stripping both those costs away gives us the net cost of gasoline as shown below:

CHART 2 – Net fuel prices

Source: Automobile Association UK, ICE Futures, fuel duty data from European Environment Agency, US data from various sources

As the data show, there is an overall trend, but differences in how quickly the costs are passed through the distribution chain, and different wholesale prices across countries can cloud the picture.

And it’s also clear that once taxes and duties are removed from the cost of gasoline, that fuel prices correlate much more closely to the crude oil price. Indeed, it could be argued that gasoline, net of duties and taxes, reflected pretty closely Brent’s decline in March and April.

So what we can suggest from this study is that the bulk cost of gasoline as a product does in fact correlate much more closely with crude oil, while the retail price of gasoline is unfortunately inflated by regressive taxes.

https://blog.ze.com/wp-content/uploads/2020/07/Examining-the-correlation-between-crudeoil-and-gasoline-prices.jpghttps://blog.ze.com/wp-content/uploads/2020/07/Examining-the-correlation-between-crudeoil-and-gasoline-prices-150x150.jpgAlessandro VitelliIndustry ViewsThe steep drop in crude oil prices between March and April came as nations representing the bulk of demand went into lockdown, bringing industrial production to a near-halt and driving road traffic down to levels not seen in decades. Passenger car traffic in the UK dropped like a stone, falling...Blogs on Enterprise Data Management Solutions | ZE