Why Petrol Prices Lag Falling Oil: Refinery Shortages and the 'Rocket and Feather' Effect

Over the past month, the numbers on Irish forecourt signs have been creeping down. Petrol and diesel are both cheaper than they were, but diesel still costs about 30 cents more per litre than it did a year ago. For drivers who watched prices climb all year, the relief has felt slow, and there is a name for that feeling: the 'rocket and feather effect', the idea that fuel prices shoot up like a rocket and drift down like a feather.

Traditionally, Irish pump prices followed international oil prices with a lag of a few weeks. Then Russia invaded Ukraine, and in March crude hit a record $120 a barrel. Petrol and diesel rose to a record of over €2.10 per litre, even after the Government agreed to cut excise duty on fuel by 15 to 20 cents.

Now international oil prices have fallen back to levels last seen before the war, yet pump prices have not dropped to match. According to this analysis, the explanation lies less in crude oil than in the cost of turning it into petrol and diesel. The world is short of refinery capacity this year, which lets the facilities that exist charge more for what they produce, and that extra charge is passed on at the pumps. Studies in the UK point to a widening gap between the price of crude going into refineries and the wholesale price of fuel coming out. One analysis estimates that this gap accounts for over 40% of the growth in road fuel prices. Refinery strikes in France and the coming price cap on Russian oil are further factors.

The analysis argues that refining and oil markets are in turn a proxy for something broader: economic outlook and market sentiment, alongside geopolitics. The current fall in pump prices reflects expectations of a gloomy economy as the world heads toward recession. Less driving means less demand for oil, and lower prices follow.

That also helps explain the rocket and feather pattern. Oil prices react fast to present conditions. A war, or an announcement from OPEC, pushes prices up quickly. A pessimistic economic forecast is different, because it concerns the future rather than the present, so it pulls prices down more gradually.

Early in the war, the Competition and Consumer Protection Commission received over 200 complaints from consumers hit by rising pump prices. Questions were raised about whether the excise cut was reaching drivers, and there was strong media and political commentary against a backdrop of high inflation and rising energy costs. After investigating, the Commission found that higher international prices drove the increases in the period before the excise cut. The delay in passing the cut to drivers came mainly from the time it took stations to receive fuel taxed at the lower rate. That delay varied by station, depending on stock levels and on supply arrangements with their suppliers.

Storage plays a part too. Underground tanks at petrol stations range from 5,000 to 80,000 litres, so a change in wholesale prices typically shows up at retail only after several days or even weeks of sales. The fuel in a tank was bought at an earlier wholesale price. That means a retailer who has not yet cut prices is not necessarily earning fatter profits, since much of the stock may have been bought at the higher price.

The author notes that academics and economists still debate whether the rocket and feather effect is real. What is not in dispute is that motorists are paying more to drive this year. With further falls working through the tanks and weaker demand weighing on oil, any relief heading into Christmas will be welcome. The piece is the author's own view and does not represent RTÉ's.