Wednesday, January 16, 2008

Oil price drops but pump price still high

In the US, the price of fuel per US gallon averages about $3.00, but can reach as high as $3.30 [EIA]. In the UK motorists have faced high prices for years. But Britain has seen a dramatic increase in prices in recent weeks. The average price for unleaded fuel stands at £1.05.9 with diesel as high as £1.10.9 a litre. At a glance it is clear the US pay far less at the pump for fuel. However after conversion the disparity in pricing is even more apparent. A US gallon is equivalent to 3.8 litres [a standard UK gallon is more at 4.5 litres]. So a litre of fuel in the US is a little over $0.86 or £0.44 [£1=$1.96 16/01/2007]. If the US were paying the same as UK motorists the price at the forecourt would be $7.88 [£4.02 per US gallon]. Canadian motorists pay only a little more than their US counterparts with fuel averaging at £0.55 per litre. Half way round the world in China and motorists are paying about ¥3.80 per litre. This is about £0.25 or $0.12. Local economic issues are obviously one reason behind such disparity in fuel prices. The average Chinese worker earns much less than a US citizen. A wage of ¥2000 per month [£133 / $260] would be considered good in China’s building economy. So in some terms petrol is considerably higher in China than in the West, compared to an individuals spending power. But with the cost of living increasing, and with wages remaining static, this balance is shifting.

George Bush’s concern at the ever increasing price of oil prompted him to ask leaders of OPEC to do something [BBC]. Talking at a meeting with Saudi businessmen President Bush said, “High energy prices can affect economic growth because it's painful for our consumers... [and] could cause the US economy to slow down". He added: "I would hope that as Opec considers different production levels that they understand that if... one of the biggest consumers' economy suffers it means less purchases, less oil and gas sold."
Barely had the President spoken than fresh concerns shook the oil market with prices plummeting to $90 per barrel. The worry is that a possible US recession may result in an economic downturn and reduce demand for crude [BBC]. A number of analysts and oil industry experts have said that recent increases in price are down to speculative buying and geo-political fears rather than a shortage of crude. The International Energy Agency said in its monthly report on Wednesday that demand for crude oil in 2008 will be 87.8m barrel per day, which represents a 2.3% rise from 2007 levels and is slightly lower than previous estimates. It said that rising demand in China, falling oil stocks, and tensions in the oil-rich Middle East and Nigeria remain "important supportive factors" for oil prices. Opec is due to meet on 1 February to discuss output levels, and there are already some calls for production to be boosted. It is unlikely, however, that any fall in oil prices will be reflected at the pump anytime soon.
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