Tag: oil stocks

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Why have diesel prices risen more than petrol prices?



From the start of the American and Israeli war with Iran on 28 February 2026 to 30 September – a period of just seven months – the retail price of petrol in the UK has risen by approximately 43p, from around 132p to 175p per litre – a rise of 33%. In contrast, the price of diesel has risen by approximately 59p, from around 142p to 201p per litre – a rise of 42%.

In several other countries the percentage difference is greater still, particularly in countries where fuel taxes are lower and thus the wholesale cost of the fuel is a larger percentage of the pump price. In the USA, for example, petrol (gasoline) prices have risen by around 38%, whereas diesel prices have risen by around 73%.

But why have diesel prices risen by more than petrol prices? The answer has to do with supply and demand.

Supply

Greater effect of the Iran war on diesel supplies.  The closing of the Strait of Hormuz has drastically cut the supply of oil from the Gulf states. This is being compounded by the Houthi attacks on Saudi shipping in the Red Sea. This has forced Saudi oil that is transported by pipeline to the Red Sea and destined for countries east of Saudi Arabia to be transported north via the Suez canal rather than south through the Bab al-Mandab Strait. This has been made worse by attacks launched from Iraq on the Saudi oil pipeline.

Middle Eastern crude oil’s composition is the most efficient for refining high-quality diesel. The restriction on exports, both of crude oil and of diesel from Gulf refineries, has thus affected diesel supplies more than petrol supplies.

Effect of Ukraine war.  Ukraine has been launching drone attacks on Russian refineries, mainly producing diesel. The resulting shortage of diesel within Russia has led it to impose a ban on diesel exports, extended at least to the end of 2026, to limit the effects on supplies for the military and for domestic users. Russia has historically been the world’s second-largest diesel exporter and the ban has reduced the world’s supply of seaborne diesel by around 12%.

Low diesel stocks.  Stocks of diesel have been run down and this has meant that there is little flexibility to draw them down further.

Refinery constraints.  Refineries cannot instantly alter their output to produce more diesel. Furthermore, diesel has become more expensive to produce in recent years due to the transition to ultra-low sulphur diesel to meet stricter environmental standards. This makes the supply of diesel relatively price inelastic, exaggerating the effect on price.

UK refineries produce more petrol than the domestic market requires, making the UK a net exporter of petrol. This higher self-sufficiency partially shields domestic petrol prices from global shocks. However, the UK does not refine enough diesel to meet domestic demand. It relies heavily on foreign imports to cover the shortfall. Thus diesel prices in the UK are more subject to global price increases.

Demand

Seasonal demand spikes.  The demand for diesel tends to rise in late summer due to extra agricultural demand for autumn crop harvests.

Low price elasticity of demand.  Unlike petrol, which is primarily consumed by individuals who can choose to drive less when prices rise, diesel is essential to industrial economies. It powers lorries, ships, buses, trains, agricultural machinery, mining equipment and many industrial machines. Because businesses must keep moving goods, farming crops and running machines, global demand for diesel is little affected by rising prices. This low price elasticity of demand results in a bigger price rise for every reduction in supply than is the case for petrol.

What is more, the transition to EVs has been greater for cars than for lorries, although many buses and vans are now electric. The electrification of the railways, however, is too long-term a project to affect short-term diesel prices and electric lorries are still in their infancy. But with rapid development of electric alternatives underway in the haulage and industrial machinery sectors, they may become less reliant on diesel in the relatively near future.

Articles

Videos

Questions

  1. Draw a demand and supply diagram for diesel and petrol to illustrate the effects discussed in this blog.
  2. Is the demand for diesel likely to be more elastic over the longer term? Explain.
  3. Compare the effects on diesel prices in the UK with one other country of your choice. How similar are the factors affecting the relative price increases in diesel and petrol in the two countries?
  4. Would cutting taxes on diesel solve the problem of higher prices for diesel users?
  5. How has the cost of heating oil and aircraft fuel changed compared to that of petrol and diesel? Explain.
  6. What would be the effects on diesel prices in the UK and the USA if Donald Trump carried out his potential plan to ban US exports of diesel?
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Will there be an oil price rebound?

People are beginning to get used to low oil prices and acting as if they are going to remain low. Oil is trading at only a little over $30 per barrel and Saudi Arabia is unwilling to backtrack on its policy of maintaining its level of production and not seeking to prevent oil prices from falling. Currently, there is still a position of over supply and hence in the short term the price could continue falling – perhaps to $20 per barrel.

But what of the future? What will happen in the medium term (6 to 12 months) and the longer term? Investment in new oil wells, both conventional and shale oil, have declined substantially. The position of over supply could rapidly come to an end. The Telegraph article below quotes the International Energy Agency’s executive director, Fatih Birol, as saying:

“Investment in oil exploration and production across the world has been cut to the bone, falling 24% last year and an estimated 17% this year. This is… far below the minimum levels needed to keep up with future demand. …

It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall: the historic investment cuts raise the odds of unpleasant oil security surprises in the not too distant future.”

And in the Overview of the IEA’s 2016 Medium-Term Oil Market Report, it is stated that

In today’s oil market there is hardly any spare production capacity other than in Saudi Arabia and Iran and significant investment is required just to maintain existing production before we move on to provide the new capacity needed to meet rising oil demand. The risk of a sharp oil price rise towards the later part of our forecast arising from insufficient investment is as potentially de-stabilising as the sharp oil price fall has proved to be.

The higher-cost conventional producers, such as Venezuela, Nigeria, Angola, Russia and off-shore producers, could take a long time to rebuild capacity as investment in conventional wells is costly, especially off-shore.

As far as shale oil producers is concerned – the prime target of Saudi Arabia’s policy of not cutting back supply – production could well bounce back after a relatively short time as wells are re-opened and investment in new wells is resumed.

But, price rises in the medium term could then be followed by lower prices again a year or two thereafter as oil from new investment comes on stream: or they could continue rising if investment is insufficient. It depends on the overall balance of demand and supply. The table shows the IEA’s forecast of production and consumption and the effect on oil stocks. From 2018, it is predicting that consumption will exceed production and that, therefore, stocks will fall – and at an accelerating rate.

But just what happens to the balance of production and consumption will also depend on expectations. If shale oil investors believe that an oil price bounce is temporary, they are likely to hold off investing. But this will, in turn, help to sustain a price bounce, which in turn, could help to encourage investment. So expectations of investors will depend on what other investors expect to happen – a very difficult outcome to predict. It’s a form of Keynesian beauty contest (see the blog post A stock market beauty contest of the machines) where what is important is what other people think will happen, which in turn depends on what they think other people will do, and so on.

Webcast

At $30 oil price, shale rebound may take much, much longer CNBC, Patti Domm , Bob Iaccino, Helima Croft and Matt Smith (25/2/16)

Article

Opec has failed to stop US shale revolution admits energy watchdog The Telegraph, Ambrose Evans-Pritchard (27/2/16)

Report

Medium-term Oil Market Report 2016: Overview International Energy Agency (IEA) (22/2/16)

Questions

  1. Using demand and supply diagrams, demonstrate (a) what happened to oil prices in 2015; (b) what is likely to happen to them in 2016; (c) what is likely to happen to them in 2017/18.
  2. Why have oil prices fallen so much over the past 12 months?
  3. Using aggregate demand and supply analysis, demonstrate the effect of lower oil prices on a national economy.
  4. What have have been the advantages and disadvantages of lower oil prices? In your answer, distinguish between the effects on different people, countries and the world generally.
  5. Why is oil supply more price elastic in the long run than in the short run?
  6. Why does supply elasticity vary between different types of oil fields (a) in the short run; (b) in the long run?
  7. What determines whether speculation about future oil prices is likely to be stabilising or destabilising?
  8. What role has OPEC played in determining the oil price over the past few months? What role can it play over the coming years?
  9. Explain the concept of a ‘Keynesian beauty contest’ in the context of speculation about future oil prices, and why this makes the prediction of future oil prices more difficult.
  10. Give some other examples of human behaviour which is in the form of a Keynesian beauty contest.
  11. Why may playing a Keynesian beauty contest lead to an undesirable Nash equilibrium?