The Low Oil Price Will Not Immediately Cut Down the Fuel Price

The Covid-19 pandemic has severely reduced the global demand for oil. But the low oil demand as well as the low crude oil price does not instantly cut down the fuel price since there is a refining process that takes place in between the upstream and downstream sectors.

Oil business operations can be divided into three subsectors, namely: upstream, midstream, and downstream. The crude oil price only represents the cost needed in the upstream activities. This activity includes oil reserves exploration, field development, and production. While the fuel price also includes the calculation of midstream and downstream costs.

Midstream activities can include refining, storage and transportation of crude oil or natural gas. Transportation is needed as oil and gas reserves are not located near to refinery locations.

In the refining process, crude oil is refined to produce different petroleum products, such as gasoline, diesel, and jet fuel. The refineries must ensure that their stock of crude oil is maintained at sufficient levels to sustain and strengthen their business. Therefore, the refining cost does not always represent the current crude price, because companies use their stock first.

The downstream sector consists of the marketing and distribution of products derived from crude oil and natural gas. The downstream sector reaches consumers through products such as gasoline or petrol, kerosene, jet fuel, diesel oil, heating oil, fuel oils, lubricants, waxes, asphalt, liquefied petroleum gas (LPG) as well as hundreds of petrochemicals.

Therefore, the current fuel price does not always follow the current crude oil price. For instance, the fuel that is used by consumers today may came from last month’s crude oil stock. Therefore, the fuel price is also based on the crude oil price last month.

In Indonesia, the government regulates the fuel price formula through the EMR Minister Decree No 62.K/12/MEM/2020. According to the regulation, the fuel price is calculated based on crude price trends in a prior month. However, the government does also consider other factors such as social and economic conditions to set the fuel price that is proposed by the oil and gas companies.

If the crude oil price falls today, then the fuel price will only reduce in the next month. Also, if the crude oil price rises this month, the fuel price will rise in the following months. But it is not a definitive decision. Government may decide to hold the fuel price so that it does not get higher if there is a special condition occurring, such as a high rate of inflation. (*)

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Posted by Niza Upperline