This piece is going to look at historical price differences between unleaded petrol and diesel in The Netherlands. In the long run the price of crude oil is the main component that affects this price differential. In the short run, state taxes and subsidies affect the price of both fuels. Additionally, environmentally oriented regulations with respect to the level of sulfur in diesel has pushed the prices up and narrowed the difference. Throughout the year there exists some seasonality with winter having smaller price difference, as demand for diesel increases and the price of diesel follows along.
Unleaded petrol has continuously been more expensive than diesel. In the Netherlands the historical gap has been around 20% and it is getting narrower with time. If in early 2006, petrol was a bit above 25% more expensive than diesel, in 2019 this price differential is 15%. What are the main drivers behind this narrowing?
While the price of crude oil is the main driver of retail fuel prices in the long-run price, differences across countries are due to various taxes and subsidies for gasoline or diesel. During the ending of 2018, crude oil prices have shown shaky signs and the price differential between petrol and diesel is quite unstable.
Crude oil prices have been on the rise for about a year, passing the $80 per barrel level in January 2019. On top of that, supply concerns from U.S. sanctions pushed the prices even further up. In the short run, exchange rates, tax policy, regulations, supply disruptions, and seasonal factors also play a role but these influences are minor compared to crude oil.
Moving forward, in an effort to decrease pollution from ships, on the 1st of January, 2020, the International Maritime Organization (IMO) will require the sulfur content in marine fuel to drop from a maximum of 3.5% down to 0.5%.
While in Europe these type of regulations began in the early 1990s, the U.S. began to phase in the ultra-low-sulfur diesel (ULSD) only in 2006. Meeting the standards of ULSD requires a substantial investment into equipment to remove the sulfur. In turn, diesel prices went substantially up and the price differential became narrower.
Experts predict that the European average gasoline price is expected to remain relatively stable at around €1.27 per liter in 2019. This average is based on 36 European countries including Germany, the UK, France, Italy, Spain and Russia. The average diesel price is expected to be €1.17 in January 2020, or around 1% more expensive than 2018. In any case, it seems certain that diesel prices are set to rise during 2019, and more significantly than petrol prices.
Let’s start with the yearly average of oil and diesel prices since 2006. The highest average price of both fuels was noted in 2012 and the lowest was in the aftermath of 2009. The world economic contraction and the lack of local demand pulled crude oil prices down during the financial crisis of 2009 which had an immediate effect on petrol and diesel.
In 2012, higher oil prices, driven by concerns about Iran, have been behind the rising price of petrol fuel. Crude oil prices rose by 12% throughout 2012 and with a recovering economy and an underlying upward trend in global demand, the risks of the price increasing further were high.
Back in 2013, a litre of petrol costed an average €1.78 in the Netherlands, compared with €1.64 in Belgium and €1.55 in Germany. Italy was closest to the Netherlands, with a litre of Euro95 costing €1.73.
Still, the price growth of petrol is nowhere close to that of diesel. The increasing cost of diesel motoring in the Netherlands is partly due to various car-related taxes, which are the highest in Europe. While tax on petrol-driven cars is the second-highest in Europe after Norway.
If we focus on the difference, the figure below can give us more insights. In 2016 petrol was 23% more expensive than diesel, while in January 2019 this gap decreased to a bit above 15%. The lowest recorded difference was that of 2019 but there are eleven months to follow. The second lowest was that of 2008 when both fuels were cheapest.
While the price difference between petrol and LPG has historically remained steady, with petrol being 60% more expensive than LPG, increasing diesel prices are narrowing the gap between diesel and petrol.
Moreover there is a seasonality noticed throughout the year. Fuel oil used for heating homes is made from the same ingredients as diesel fuel. As it gets colder throughout the year, the demand for heating oil rises.
In turn this pushes the diesel price up and narrows the price difference between petrol and diesel further. On average, petrol is 21% more expensive during the period May- September and 17% more than diesel during October- February.
Download the full report: Diesel prices are set to rise.