Unraveling the Puzzle of Fuel Prices: What Makes Them Cheap or Expensive?
The Rationality Behind Perceiving Gasoline as Affordable by Many - People frequently perceive gasoline as inexpensive due to its subsidized pricing and the standardization of measurement, which can make its actual cost appear lower than it may be in comparison to other goods and services.
Gas stations today are offering fuel at considerably lower prices compared to the past few years. However, it's not accurate to categorize fuel as cheap exclusively based on current prices. Let's delve into this conundrum and bridge the perspective gap on fuel price dynamics.
Recent Trends vs Historical Data
In May, the average monthly price for a liter of Super E10 and diesel was 1.68 and 1.56 euros, respectively, according to ADAC data. These figures are lower than the average for 2024 and significantly cheaper than in 2022 and 2023, when both fuels temporarily surpassed the 2-euros-per-liter mark.
However, prices during 2020 saw diesel falling below the 1-euro mark, making it more than 40 cents cheaper than current prices. Compared to the decade between 2010 and 2019, today's fuel prices are approximately 20 cents higher on average.
Considering Inflation
Ignoring the influence of inflation can perpetuate misconceptions about fuel prices. A fair comparison would account for inflation, which was around 60% over the past two decades. After adjusting fuel prices based on this inflation rate, we can deduce that diesel would have been more expensive in 12 out of the last 25 years. Gasoline would have been more expensive in 18.
Breaking Down Fuel Price Components
The price of fuel is primarily determined by three components: oil price, taxes and levies, and processing and distribution costs. The oil price is the most volatile component and is responsible for driving price fluctuations. However, determining the exact share of oil price per liter of fuel is challenging due to the derivation of various products from oil.
Taxes encompass energy tax, value-added tax, and CO2 tax. Energy tax — constant since 2003, aside from the brief fuel price brake in 2022 — dampens the effects of price changes in fuel. Value-added tax plays a minimal role in price development, whereas the CO2 price has only become relevant in recent years and still remains relatively manageable.
The remaining costs are for processing, distribution, and the profits of mineral oil companies. These costs are likely to increase due to rising expenses associated with labor, energy, transport, etc. The exact figures may not be straightforward to pin down, but it's clear that this component is smaller compared to taxes and levies.
The Expert's Take
Christian Laberer, a fuel market expert at ADAC, suggests a nuanced view on fuel prices. "I wouldn't say that fuel is currently cheap," he says. "We're heading towards 2025 being the fourth most expensive year for filling up. If inflation is factored in, the narrative changes, but there's still a considerable margin for prices to dip, particularly in the wholesale margins and at refineries."
Why Do Fuel Prices Feel Cheap to Some?
Laberer attributes this sensation to a phenomenon known as "adaptation." Over time, people become acclimated to their circumstances, even if those circumstances involve high fuel prices. When prices temporarily decrease, as we see today, they may feel relatively cheap compared to recent memory. This happens because we develop a sort of "relative happiness" when experiencing slight improvements, much like feeling warm when moving from a cold to a cool room.
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[4] "Seasonal Factors Impacting Gas Prices." AAA. (2023). Link
[5] "Ukraine Conflict and Its Impact on Oil Prices." The Balance. (2022). Link
- Regarding the ongoing conversation about fuel prices, it's crucial to consider the impact of industry-specific policies such as community policy and employment policy on determining fuel prices, given that energy is a crucial component of both sectors.
- The cheaper pricing of fuel today could be influenced by the finance sector's efforts in optimizing oil production costs through technological advancements and streamlined supply chain management, which eventually trickle down to the end consumer.
