Why petrol prices go up like rockets but fall like feathers – in S’pore and globally

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SINGAPORE – It took three days for ripples of the war with Iran, launched by the US and Israel on Feb 28, to seep into fuel pumps in Singapore.

The war has caused a disruption in the supply of crude oil from the Middle East and triggered a surge in prices of the commodity.

Major petrol station operators responded on March 3 by raising prices of fuel, which is largely refined from crude oil from the oil-and-gas-rich region.

The situation can be viewed as being unfair to consumers, as price increases have continued to snowball in a fraction of the time it would have taken for petrol or diesel stocks to run out. This is driving concerns that petrol stations may be profiteering ahead of a supply crunch.

As a taxi driver said about paying more at the pump: “This is daylight robbery. It is not even new oil that has arrived from war-affected places; this is still the old oil.”

Pump prices of petrol and diesel in Singapore recently crossed highs set during the Ukraine crisis in 2022.

Pricing in the unknowns

Petrol prices in Singapore are fixed by retailers every day, drawing on the Mean of Platts Singapore average of daily price assessments published by S&P Global Platts, which are not made public.

Caltex’s website states: “The cost of crude oil contributes to almost 50 per cent of the retail price of petroleum, and has the most significant long-term impact.

“Political volatility in oil-producing regions has historically impacted on crude oil prices and the political situation in the Middle East is of global concern.”

According to Esso, wholesale prices of fuel can be driven by factors including inventory levels, and storage and transportation costs.

“Besides wholesale prices, Esso petrol prices in Singapore are also influenced by other factors like land prices, government duties or taxes, currency exchange rates and competitive market forces,” the firm said on its website.

It boils down to the economic principle of supply and demand because petrol prices here are not controlled.

Iran has declared the closure of the Strait of Hormuz, through which a fifth of the world’s oil supply usually passes, and attacked foreign tankers in the waterway.

Singapore imports all the crude oil it needs, mostly from suppliers in the Middle East. It is unclear whether alternative routes for these deliveries have been established.

At the same time, demand for fuel is unlikely to ease. As most vehicles run on petrol or diesel, drivers need fuel to keep up with their daily routines. They will likely fill their tanks even when it costs more per litre.

Despite major markets like China – currently the world’s largest importer of crude oil – increasingly adopting electric vehicles, global demand for oil is still projected to rise in the coming years.

Things could change as some oil tankers appear to have found a way through the strait by switching off their tracking systems.

Shipping intelligence data provider Kpler said that as at March 11, an estimated 14 million barrels of oil had been transported in the critical waters since the war began. But this is still far from the average of 20 million barrels per day seen before the conflict.

There are also questions about how long the Iran war will last, and whether it will escalate.

Petrol stations are now pricing in the war with many unknowns while anticipating higher costs in their supply chains.

This may come through higher insurance costs for oil tankers, or a lower supply of oil from the Middle East, which could persist.

It is unsurprising that costs are already being passed to consumers, as demand for fuel is expected to stay afloat.

‘Rockets and feathers’

Experts believe the “rockets and feathers” phenomenon is also playing out.

The term was coined by economist and researcher Robert Bacon, who observed that petrol prices in the UK took off like a rocket when crude oil prices increased, and fell slowly like a feather when crude oil prices decreased.

He recorded “faster and more concentrated responses” by petrol prices to increases in the cost of oil, in findings published in the Energy Economics journal in July 1991.

Mr Sam Chua, Rystad Energy’s principal for Asia-Pacific advisory, said: "When costs rise, retailers move fast to protect their margins. No business wants to absorb a loss.

“But when costs fall, there is little urgency to be the first to pass on the savings.”

Because fuel demand is barely sensitive to price changes, petrol stations “face less pressure to quickly lower prices when costs come down”, he added.

This pricing scenario largely played out in Singapore when Russia invaded Ukraine on Feb 24, 2022.

Back then, posted prices of 95-octane petrol ranged from $2.75 to $2.85 per litre, according to records from the Consumers Association of Singapore’s price tracker, Price Kaki, before climbing to a peak of $3.42 per litre.

Months passed before oil prices eased, and prices of 95-octane eventually returned to pre-invasion levels.

On Sept 19, 2022, the most popular grade of petrol was priced at $2.82 per litre at most petrol stations, before factoring in discounts.

Mr Paul Gooden, portfolio manager at investment management firm Ninety One, said there were two ways to look at the situation.

“If you are being charitable, you would say petrol stations are trying to reduce the volatility in prices for the consumer,” he said.

“If you are being uncharitable, you would say they are taking advantage of the situation to make more money.”

Even if the Middle East conflict subsides, consumers may face a harsh reality, as petrol station operators could hesitate to lower fuel prices ahead of their competitors.

Mr Chua said: “With prices across retailers tending to move in tandem, no single player has a strong incentive to cut first.”