Impact of the recent oil price increase on drivers

by Neven Valev, October 3, 2023

The thirty percent increase in oil prices in the last three months has pushed up the world average gasoline price by 0.07 USD from 1.23 USD per liter to 1.30 USD per liter. The world average diesel price increased by even more - 0.14 USD - from 1.14 USD per liter to 1.28 USD per liter. Diesel prices have been more volatile after the announced ban on diesel imports from Russia to the European Union. The global supply routes for diesel fuel have been readjusting but the shift is not complete and oil price shocks magnify these ongoing supply issues.

The extent, however, to which the oil price changes impact retail fuel prices differs by country. In a significant portion of the world - about a quarter of all countries - retail prices did not change at all. These are typically less developed countries where governments control and often subsidize fuel prices as well as in some oil rich countries such as Saudi Arabia. In some larger economies including Mexico and India, prices are not fixed on a continuous basis, but the governments interfere in the fuel market to shield drivers from rapid price increases. In the advanced economies, fuel prices are largely liberalized and move in sync with oil prices but even there the extent to which they adjust to oil price changes varies with local conditions and fuel tax policy. For example, in the last three months diesel prices increased by about 16 percent in Germany, 20 percent in the U.S., and 28 percent in the Netherlands.

Because of these specifics across countries, when oil prices are on the rise, fuel price differences across countries also increase and this complicates international logistics and transport. Also, when prices are on the rise, some governments stiffen regulations, lower taxes, or freeze prices especially if elections are coming up or there is social tension for other reasons. The size, magnitude, and duration of these interventions is difficult to predict and leads to even more uncertainty about fuel cost. In short, when oil prices increase substantially fuel prices are not only higher, but they also vary more by country and are less predictable.

These differences in price adjustment also translate into different economic impacts on the drivers. According to the latest available EIA data from 2021, the world consumes about 50 million barrels of gasoline and diesel per day, about equally split. Therefore, on a worldwide level, the increase in gasoline and diesel prices implies an additional cost of 0.881 billion USD per day. That is about 0.3 percent of world GDP on a daily basis (world GDP divided by 365 days) and about 0.5 percent of world household consumption. Whether or not that is a significant cost is open to discussion but if oil prices remain high, the cost would start to add up.

The impact on drivers is greater in countries that allow domestic fuel prices to increase and, given the more rapid increase in diesel prices, in countries that use more diesel fuel. For example, there was limited impact on drivers in Mexico and India and no impact in Saudi Arabia. The impact for the U.S. and the United Kingdom has been similar to that of the world economy. In the Netherlands and South Africa, in contrast, where prices increased, diesel is more heavily used than gasoline, and transport is an important part of the economy the cost approaches 1 percent of GDP and 1.4 percent of household consumption. Therefore, in those and other similar countries - for example, in much of Europe - the impact is significant.

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