It’s not news to anyone that the price of diesel has been shooting higher in recent weeks, with the agricultural version generally well north of €1.10/l (including VAT), while white diesel is around €1.70/l at the pump.
Even though much of the increase in recent weeks has been driven by international developments, there is an element of Irish Government policy involved in the price rises – and there will be more to come from that side over the coming months as the excise reduction introduced after Russia’s invasion of Ukraine is unwound.
On Friday of this week, agricultural diesel will see an extra cent added to the price of a litre, while road diesel will jump by 5c/l. Petrol will jump by 7c/l – so if you’re reading this on Thursday, it’s probably worth making a trip to fill your tank.
On 31 October, there will be a further 3c/l on green diesel, 6c/l on white and 8c/l for petrol.
Between now and the end of October, there will also be a budget which is scheduled to increase the carbon tac payment on fuels, adding 2 c/l to both petrol and diesel.
In last year’s budget, that 2 c/l increase was offset by reducing the National Oil Reserves Agency (NORA) levy to zero c/l. That levy was reinstated in March of this year.
There is unlikely to be a similar offset against this year’s increase, as the NORA levy is that organisation’s main source of funding and the levy not only funds NORA but is also forwarded from NORA to the Government’s Climate Action Fund – for a total of €96m in 2021, the most recent year for which NORA accounts are available.
So, all else being equal, there will be an increase of 4c/l on agricultural diesel, 11c/l on road diesel and 15c/l on petrol by the end of October. The budget will also add further pressure on motorists with fresh carbon tax increases.
The Irish Farmers Association (IFA) this week called on the Government to suspend indefinitely the scheduled rise in excise duty.
Main driver of price
Outside Ireland, the main driver of the price of diesel is the international supply of and demand for crude oil, with some element of refinery availability adding to the volatility.
As we can see in Figure 1, the price of diesel at the pumps tends to rise when the price of oil gets higher, but it isn’t so good at falling when the price of crude drops.
The average price of a barrel of Brent crude – the global benchmark – in August was around €77.80, while the average price of diesel at the pump was €1.73 (according to data from the AA).
In March 2014, the price of a barrel of Brent was also €77.80, while the price at the pump for diesel was €1.46. Whatever about the lack of price drops, the data shows that we should worry about price increases on international oil markets.
For much of this year, the picture had been fairly benign with oil holding around €70/barrel. A couple of things in recent weeks have driven that higher.
China, the world’s largest oil importer, has announced further measures to support economic growth in the country.
The jury is still out on how effective the stimulus package will be for growth in the Asian economy, but anything that looks like it might bring an increase in demand will push the price of crude higher.
While the announcement of the stimulus package has led to a jump in oil prices, there are also supply dynamics at work.
Saudi Arabia, the world’s largest producer is keeping its foot firmly on the brake at the moment as it tries to keep prices elevated.
The country announced it would reduce production by one million barrels per day for July and August.
Whatever the outlook for the global economy and demand, Saudi Arabia seems certain to keep crude oil supply tight
Earlier this month, Riyadh said they would extend the production cut to the end of September and it seems increasingly likely it will continue into October after the kingdom’s energy minister said that the production cut could be “extended, or extended and deepened”. So, whatever the outlook for the global economy and demand, Saudi Arabia seems certain to keep crude oil supply tight.
Lastly, we are coming into peak hurricane season in the Gulf of Mexico.
The US National Oceanic and Atmospheric Administration say that the remainder of the 2023 Atlantic hurricane season could be busier than usual as warmer oceans allow more powerful storms to form.
With the Gulf of Mexico being a producer of oil, with a major refinery transportation hub on the southern US coast, hurricane season brings production risks.
More hurricanes mean more risk, and more risk means higher chances of supply disruptions – either of crude or of refined products such as diesel.
The global supply and demand balance is completely out of Ireland’s hands. However, the Government is completely in control of how much excise duty it adds to fuel prices.
IFA farm business chair Rose Mary McDonagh this week said it “seems unconscionable” that the Government would proceed with imposing further taxes during a period of continued high costs for farmers.
It is hard to disagree with her. The Government does have the opportunity to look at how excise on fuel is calculated, and how at times of high costs it can be used as an instrument to manage prices. When fuel costs surged in the wake of the Russian invasion of Ukraine, the Government was able to slash excise to address the crisis.
It would be a huge own goal to make their own crisis now by adding that excise back when prices are already rising. Minister for Finance Michael McGrath seems to agree, suggesting this week that the end of October excise hike could “form part of budget negotiations”.