October 4, 2022

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Crude oil prices are now back to where they were in January 2022, but retail pump prices are now more than 20% above prices back then. Many are wondering why. Without cost transparency suspicion understandably abounds.

a person s hand holding a gas pump
Photo by Engin Akyurt on Pexels.com

In mid January 2022, before Russia invaded Ukraine, WTI crude oil was trading below US$ 90 a barrel. Then a litre of petrol in Switzerland retailed at CHF 1.71 (US$ 1.88) on average. By 15 August 2022, WTI crude was back down below US$ 90 a barrel after peaking at a price of more than US$ 120 in May 2022. However, the pump price for a litre of fuel remains at the suspiciously high price of CHF 2.17 (US$ 2.29). Diesel pump prices in Switzerland have followed a similar path.

If fuel tax hasn’t changed and the raw cost of inputs (mainly crude oil) are back to where they were in January 2022, why is the retail price of a litre of petrol now 22% higher in US$ terms than it was in January?

Without more transparency this question is difficult to answer.

The price of a litre of fuel at the pump broadly consists of the price of crude oil, the cost of refining plus the margins charged by refiners, the costs of distribution and marketing, a retail margin, and taxes. In Switzerland, taxes have not changed since January and we know the price of crude is back to where it was. Therefore the mystery 22% price difference must be somewhere in refining costs and margins, costs of distribution and marketing, and retail margins.

Before the Russia’s invasion of Ukraine, some of the petrol and diesel consumed in Europe was being refined in Russia. A report by the BBC in June 2022 suggests refiners outside Russia are using a shortage of refining capacity to rake in high margins. Margins on refining petrol were up 366% and margins on diesel were up 648%, according to the BBC article. So higher refinery costs and margins probably explain at least some of the price difference. Higher transport costs could also be a factor.

Price stickiness, a phenomenon where companies are quick to raise prices but slow to cut them, may also explain some of the difference. The trigger to bring prices back down is competition. In many sectors in Switzerland price competition is weak, something that underscores the price stickiness problem. A Swiss parliamentary commission thinks a fuel price comparison website could help to fix this.

According to the parliamentary commission, a digital platform showing the price of fuel at gas stations across the country would boost competition and help in the fight against high prices. Consumers could see where the cheapest fuel is and buy there. 16 voted in favour of the idea versus 7 against. The commission also decided (12 versus 10 votes) to put forward a motion to investigate suspected competition problems in the energy market. This work would be done by Comco, Switzerland’s competition watchdog. Germany, Austria and the UK have already launched similar investigations.

More on this:
RTS article (in French) – Take a 5 minute French test now

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