Diesel dilemma - why has the cheap fuel suddenly sky-rocketed?

2008 has seen  record increases in oil prices, but that does not explain why diesel is now so much dearer than petrol. For diesel motorists and especially for the haulage industry, the price rises have been horrific. Just when the car tax changes are designed to persuade us all to buy diesel engines for the sake of the environment, the price shoots up to record levels. Is this rip-off Ireland again, or is there more going on?

The AA has been monitoring the price of fuel in Ireland ever since deregulation in 1991. Over the years there has always been a seasonal pattern to fuel costs. Diesel is essentially the same as home heating oil, and in a globalised market that is always more expensive in the Northern hemisphere winter. Summer is the ‘gasoline season’, when Americans take to the roads and push up the price of gas on global markets.

Here in Ireland we charge slightly less tax on diesel than we do on petrol, so all other things being equal it should be slightly cheaper. Usually the two fuels cost about the same at Christmas time with petrol about 6 or 7 cent more expensive in the Summer.  Not this year.

Spring came and went and diesel prices just kept rising. They have been rising ever since. In the AA’s June survey of fuel prices (issued 16th June), diesel cost 142.9 cent per litre and petrol 130.5 cent. There is no end in sight.  With demand still high on world markets there is no prospect of improvement as we head into July and August.

Is it a conspiracy theory or a cartel?

Pumping Petrol

No - at least if it is it is not confined to Ireland. Diesel prices are at record highs right across Europe and beyond. The AA has called on both the Irish government and the European Commission to investigate and to get explanations from the global oil industry as to what exactly is going on. We can understand (even if it’s painful) fuel prices going up when oil goes up, but the diesel discrepancy of 2008 needs more explanation.

Is it the government taking advantage of the tax changes on diesel cars?

No. The new tax rules do not come into effect until next month, and it will take quite a bit of time for that to make its influence felt in terms of the numbers of diesel cars on the roads. Currently about 18% of private cars in Ireland are diesels. Norway introduced a tax change similar to ours at the start of 2007 and saw its diesel car sales double; Finland did something similar. Diesel should grow steadily but it will be quite a few years before it overtakes petrol.

Also, there is little that the Irish government can do about world diesel prices. Ireland is tiny in terms of global fuel usage. We may use a disproportionate amount of oil and are very oil dependent, but our consumption still only comes to 183,000 barrels of oil per day. This is less than a quarter of a per cent of global usage. Our government cannot influence that market – we are like a cork on the ocean waves.

If it's a European & Global problem, then what is causing it?

There are a number of explanations offered. They may not explain the whole problem between them, but among the significant contributors are:

  1. The US refining industry over-estimated the consumer demand for gasoline last winter and produced too much of it, with relatively little diesel manufactured. This lead to a relative global surplus of gasoline and shortage of diesel on international markets which affected world prices. This may have been true or partly true but it does not explain why the effect is still with us in June.
  2. European refineries & diesel standards. Diesel used to be cheaper to make than petrol (you basically just distil petroleum oil at between 200 & 350 degrees Celsius and there you are). However successive European Auto-Oil directives have made that process more complex. European diesel must be ultra-low in sulphur and there are all sorts of standards around particulates, benzene, volatile organic compounds etc. Diesel now costs more to make, and more importantly there is a capacity shortage in the number of refineries that can make it according to the strict specifications. This has certainly pushed up European diesel prices, but again it's hard to see why it suddenly got so bad this year.
  3. Speculation on international markets and the weak dollar. It's not just oil that has gone up in price. Gold has rocketed to levels not seen since the early 1980s; diamonds and other commodities have also shot up. With confidence in banking shaky and the dollar in decline a lot of major international money has bought into safer bets, often commodities and that includes diesel.
  4. The Chinese earthquake. Although more recent, the Sechuan disaster is having an impact beyond the human tragedy. Chinese coal production has been severely curtailed, and because of this the Chinese need to buy more diesel

What can Ireland do about it?

Cut the taxes.  The figure fluctuates a bit because VAT is a percentage, but in general about 50% of the price of diesel and 55% of the price of petrol is tax. The Government collects about €2.2 billion per annum from fuel taxes, which is more than 4% of all tax monies. The motorist collectively contributes some €6 billion in taxes, which is 9% of all government revenue.

Strange as it may seem, these figures are better than most of Europe. Our colleague countries, especially in Northern Europe, tax fuel even more severely. This is worth bearing in mind when we hear western governments screaming at OPEC to increase oil production and reduce prices. When a barrel of oil is sold on European forecourts as petrol and diesel it makes 4 and 5 times more money for the local government in taxation than it does for the OPEC country that produced it.

Did you know? Some facts about our place in an oil-thirsty world