The oil prices never stops falling. Brent, the 159 liter barrel of oil crude extracted in the North Sea, and which refers to Europe, was traded on Monday April 20 for € 18. In early January, it was still € 61. A dramatic drop, which can be explained by several factors.
The Covid-19 crisis brought the world to a halt, and therefore caused world oil consumption to plummet. Supply has remained relatively stable because it is very difficult to stop production from an oil well. The Organization of the Petroleum Exporting Countries (OPEC) has been successful in reaching agreement with its partners mid-April to reduce production in order to bring prices up, but the effects are still pending.
A slight drop
Some contracts related to the delivery of barrels, like the one produced in Texas, have even fallen below zero ! Producers should therefore pay to “get rid” of their oil … The stocks of refineries and some states are full, so nobody wants this oil available, even inexpensive, because nobody would know where to store it. By a classic mechanism of balance between supply and demand, the price therefore continues to collapse.
Faced with such a debacle, it is tempting to believe that the price at the pump will mechanically drop. A decrease can be effectively observed. The price of unleaded 95 went from 1.54 € per liter in mid-January to 1.26 € / l in mid-April.
“An extremely taxed product”
But erosion remains low. There are several reasons for this. First of all, this historic crash concerns Texas oil and not the famous Brent. Next, the price structure at the pump (see infographic below) greatly reduces variations between the price of a barrel and the price for the consumer.
In the case of diesel, the price per barrel represents only 11% of the final price. Thus, supposing that the evolution is linear, if the barrel of Brent, today at 18 € collapsed to 5 €, the diesel currently at 1.26 € / l would lose … 10 cents.
The dramatic plummets in oil prices are therefore more likely to worry financial experts than to delight consumers. As summarized by Jean-Charles Doussau, consultant at Eight Adivsory, a financial services consultancy: This is a very financial moment, but there will be little impact at the pump, because oil is a highly taxed product.
On the other hand, the price of domestic fuel is made up to 50% of the price of a barrel. Fuel oil is therefore around € 715 per 1,000 liters, compared to € 993 in early January.
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