You might argue that the upsides of low oil prices outweigh these disadvantages. Let’s check what benefits you are likely to have seen. A lot of the oil we use has been transformed beyond recognition (for example, makeup or paint), but petrol and heating oil still bear some resemblance to the stuff that comes out of the ground.
Did their prices fall in line with oil prices? The chart above shows the price of road fuels and the price of oil in the UK and the US. You can see that UK petrol and diesel prices did not fall with the price of oil, whereas US prices did. (Don’t worry too much about the actual numbers; just note the shape of the lines.)
Some people caution that UK petrol prices ‘cannot’ drop with oil prices, because of fuel duty and VAT. 177 Of course, that would explain the situation – so let’s see how true it is. Here comes the maths.
First we will make some assumptions about the components of the price of a litre of unleaded petrol:
Fixed cost – fuel duty (58p).
Fixed cost – retailers’ markup (6.43p; remember, the retailer has to find all their costs out of this).
The price of oil (this includes exploration, transport, production and refining costs as well as tax and profit).
Using the formula below, we can calculate the price of oil in a litre of petrol when petrol cost £1.29/litre in June 2014, and then work out how much it should have cost as the price of oil fell.
You can see the answers in the chart below. The bar shows the makeup of the price of petrol in June 2014. The solid line shows how the price of petrol changed. The dotted line shows how it could have changed. We could have been paying less than a pound per litre from August 2015, but these prices did not arrive until Asda ‘slashed’ their price on 27 November 2015. In the meantime, someone be it the oil companies, refineries or retailers benefited from the difference between the potential and actual prices (the exchequer definitely did).
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