On Monday 20th April history was made when the price of American benchmark oil went negative. But what does this mean for consumers and will it feed through into lower heating bills and cheaper prices at the pump?
The price of oil has been on a downward trend for several months now, due to a slowing world economy and a glut in supply. However since the start of March, demand for oil has collapsed as the world economy has come to a standstill due to Covid-19. However with output remaining strong, the economic laws of supply and demand got to work, leading to a collapse in the price of oil over the past few weeks.
To make matters worse, as oil output continued to rise, and no one to sell it to, storage facilities became overwhelmed. Energy traders then panicked and started offering people money to take the oil off their hands - hence leading to negative prices.
And although the negative prices have been regarded as a blip - and only affected American prices for a short period of time - cheap oil is here for the short-term at least.
But what does all this mean for consumers?
Will it lead to lower electricity bills?
In short, no.
Firstly, energy companies buy their energy on wholesale markets weeks and months in advance. So the price you’re being charged for your gas and electricity today is often based on the price of oil, coal, peat, and gas months ago.
Secondly, and most importantly, we barely use oil anymore in Ireland for generating electricity and haven’t done so for several years. This is largely due to environmental reasons as we aim to cut our carbon emissions.
In 2018, according to the Sustainable Energy Authority of Ireland (SEAI), only 0.5% of electricity generation in Ireland came from oil. And this probably decreased further last year. So no matter how cheap oil becomes, it’ll have a negligible impact on electricity prices in Ireland.
|
Electricity fuel source |
Percentage |
|
Natural gas |
51.8% |
|
Renewables
|
33% Of which Wind: 28% Hydro: 2.20% Solar: 0.05% Other: 2.70%
|
|
Coal |
7% |
|
Peat |
6.8% |
|
Oil |
0.5% |
Source: SEAI Energy in Ireland 2019 report
Will it lead to lower petrol and diesel prices?
In short, yes, but not as much as you’d expect.
Already over the past few weeks we've prices at the pump fall by around 10 to 15 cent a litre.
But over 60% (c. €0.70 at present) of the price you pay on the forecourt for a litre of petrol goes directly to the Government in the form of excise duty, VAT and carbon tax. Slightly less for diesel. Oil only makes up around 20 to 25% of the price with the rest being the retailer's profit margin.
So a 30 or 40% reduction in the price of a barrel of oil is not going to equate to a corresponding decrease in the price of a litre of petrol or diesel.
Also, only American oil fell into negative territory. Brent, the international benchmark, lost 8.9% on Monday to fall to $25.57 a barrel, as it's less immediately affected by storage issues.
Finally, as you've probably just noticed, oil is priced in dollars. But the euro has fallen sharply against the dollar on foreign exchange markets over the past year, meaning when we adjust the price of a barrel of oil back into euro, the decline in price hasn't been as great.
Outlook
The negative prices we saw recently were based on a specific set of market circumstances and already we've seen prices rebound into positive territory in America.
However the price of oil is likely to remain under pressure for the rest of 2020, meaning the outlook for petrol and diesel is fairly benign with more, albeit smaller, price reductions to be expected.
The good news is that natural gas prices have also fallen sharply in recent months meaning those lucky enough to have gas-fired central heating should see further fall in their bills. As gas also makes up around half of our electricity generation, falls in the price of electricity can also be expected, but this won't have anything to do with the price of oil.
