Many components behind petrol price

Crude oil prices have fallen to around US$30 a barrel, down from over US$100 two years ago. Readers have written in to askST why petrol prices have not fallen in tandem. Senior transport correspondent Christopher Tan answers.

Besides the cost of oil, a litre of petrol consists of a number of other cost components.

These include land and building cost, distribution and operations, and petrol duty.

Fuel companies here also engage in discounts, mostly tied to credit cards. These discounts are so widespread and perennial that they can be considered a fixed marketing cost.

In total, the cost of crude oil accounts for only about one-third of total cost. Hence a US$70 drop in crude price works out to be a US$21 correction in a barrel of petrol.

Let's take the analogy of other goods. If, for example, the price of steel fell by 50 per cent, the price of a BMW would not drop by 50 per cent. Because steel is but one component of a car. And if cocoa prices halved, a Mars bar's price will not halve, because cocoa is only one ingredient.

The other thing is the conversion from a barrel to a litre. A barrel is roughly 159 litres. So, if a barrel of oil drops by US$70, it translates to a US$21 drop in a barrel of petrol (see above), which in turn translates to 13 US cents per litre.

Lastly, we have to take exchange-rate fluctuations into account. When oil was more than US$100/barrel, the US dollar was around S$1.25. Now, it is S$1.40.

Today, a litre of 95-octane petrol (the most popular grade) is $1.86 a litre before discount - some 30 cents lower than in 2013. Since then, one other cost component has risen - petrol duty, which has risen by 15 cents a litre for 95-octane. If not for the change in duty, 95-octane would have fallen by 45 cents, or around 20 per cent.

Having said all that, oil companies are profit-motivated businesses; and it would not be a surprise if they delayed downward adjustments for as long as possible.

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A version of this article appeared in the print edition of The Straits Times on February 06, 2016, with the headline Many components behind petrol price. Subscribe