Over the last twelve months Middle East producers’ share of the net profit from a barrel of oil has doubled in both the US and Europe. As crude prices fluctuate over time, the way in which the profit on each barrel is distributed between upstream producers, refiners and retailers changes considerably. Retail prices tend to vary less than crude prices so that neither price cuts nor price increases are fully passed on to consumers. Where taxes on oil products are relatively low, as in the US, crude prices and retail prices move roughly in tandem. However, in high tax areas such as Europe, retail prices are influenced much more by governments and may become almost completely disassociated from the spot market.
The dominant role of taxation in Europe allows downstream operators, such as wholesalers and distributors, to keep margins higher than in the US, where consumers are more sensitive to movements in global spot prices. Over the last ten years, UK downstream margins on a barrel of Mideast Gulf crude have averaged around $17/bbl, twice the level achieved by US companies.
In general, the higher the crude price, the higher the proportion of the post-tax price that goes to the producer. During the first part of last year, retail prices in the US rose more slowly than crude, allowing producers to reap all the benefits of higher prices while refiners and distributors saw their margins squeezed. By contrast, UK consumers have seen retail prices increase faster than crude, with the gains being shared between producers, distributors and government.
US consumers, however, are no longer being shielded from the full impact of the rise in crude prices. Crude and product stocks have been seriously depleted, leaving forward cover close to historic lows. This has increased pressure on distributors to meet strong demand without the normal buffer of inventory supplies. The shortage of oil has finally moved downstream to the end-user and distributors are now benefiting more than producers from price rises. Downstream margins have doubled in just two months and could rise further if low stocks lead to gasoline shortages in the spring.