Going to the pump is becoming increasingly expensive in Spain. For 11 weeks now, motorists have been facing price hikes for diesel and petrol, which have now reached €1.751 per litre for super 95 and €1.668 per litre for diesel respectively.
Although prices are still nowhere near the peaks of summer 2022, super 95 set a new record this week with the highest price since late November. That was when the discount of 20 cents per litre of fuel, introduced by the government in April, was in force after oil prices reached more than $110 per barrel in March.
The rise in the price of crude oil is driving up fuel prices. However, it is also influenced by other factors such as their specific prices on international markets – independent of oil – taxes, logistics costs and gross margins.
Oil price rise
The rise in oil prices has two causes: production cuts by exporting countries and increased demand. ‘Right now, the main factor is the production cut by producing countries,’ says Antonio Turiel, researcher and oil market expert. Exporters have been turning the tap for months in a bid to raise the price of crude.
The Organisation of Petroleum Exporting Countries (OPEC) agreed almost a year ago, in October 2022, to cut oil production by 2 million barrels a day. In April, the reduction was increased to 3.6 million. In June, exporters decided to extend this reduction until the end of 2024, a year longer than originally planned. Saudi Arabia and Russia added an additional cut in oil production of 1.3 million barrels per day. This is until the end of the year.
Production cuts versus rising demand
By cutting production, exporting countries are aiming for a rise in crude oil prices. Despite producer countries’ austerity strategy, an excessive increase in the price of oil could backfire. ‘If the price rises too much, it will trigger a recession. A contraction in economic activity lowers demand and hence the price,’ warns Turiel, who points out that the price of a barrel could still rise to $110.
The risk lies in the high dependence of almost all manufacturing sectors on the ‘black gold’. At the same time that OPEC has cut production, world demand for oil has risen. This is mainly due to China’s post-pandemic resurgence, the increase in flights during the summer and the needs of the petrochemical industry, according to the Spanish Association of Petroleum Producers (AOP).
In June, the International Energy Agency (IEA) recorded a record world demand for oil of 103 million barrels per day. Furthermore, it points out that consumption will continue to rise in the coming years.
Fears of a rise in diesel prices
‘Right now, the price of diesel is the most worrying,’ Turiel said. He does not rule out the possibility that diesel prices will again approach €2. This is also influenced by Russia’s veto on oil imports. ‘Diesel is the lifeblood of our system: it is transport, mining and agriculture,’ he explains. Diesel prices have risen more than petrol over the past 11 weeks.
‘If the fuel prices we have now are maintained for a few more months, they will eventually be passed on to other prices, because they make logistics more expensive and this makes the whole chain more expensive,’ explains economist Antoni Cunyat, a lecturer at the Open University of Catalonia (UOC) and the University of Valencia. For the expert, the current situation is not comparable to the situation after the outbreak of the war in Ukraine. ‘We have not reached the maxima reached then and we are starting with higher price levels, which means that the quantitative increase is not as high, but the important thing is how long these petrol and diesel prices last,’ he qualifies.
According to data from the National Institute of Statistics (INE), the rebound in inflation over the past two months is already largely due to higher fuel prices. Inflation is forecast to remain on this upward trajectory until the end of the year. The Bank of Spain this week updated its forecast for the Spanish economy and raised its inflation expectations for 2023 and 2024 to 3.6% and 4.3%, respectively, due to higher energy prices and especially oil prices.