What Drives Fuel Prices?

Fuel prices are affected by a number of factors including the cost of crude oil and refined product, land costs, competition in the market, operating costs and taxes.

The fuel price at the retail station comprises product cost, government duties and taxes, land costs and gross distribution margin. The gross distribution margin includes storage and handling, distribution costs and retail margins. In some markets, taxes account for over 60% of the fuel price (e.g. in the UK and the Netherlands).

Market changes dictate price fluctuations.  The key factors driving adjustments in fuel price are changes in the cost of crude oil and refined product (e.g. gasoline and diesel) and competition between retail stations.  Use the links below to find out more about:

• Link between crude oil price and refined product price
• Factors affecting the price of crude oil and refined product
• Competition in local markets
• Fuel specifications

Crude oil and refined product are traded on the open market. This section explains some of the factors that drive changes in crude oil and refined product prices.

Increasing demand for crude oil and refined product

The demand for crude oil and refined products is increasing, particularly in China and India.

Limits in global oil refining capacity

In order to meet the growing demand for refined products, refineries around the world are now running at near full capacity.   Looking to the future, new refineries will need to be built to continue to meet rising demand.  A key factor impacting the development of new refineries is the significant investment required to build and operate them, which is also increasing due to more stringent global environmental standards in regard to environmental performance at refineries and the use of cleaner fuels.

Security of crude oil supply

Political instability in the Middle East continues to cause uncertainties around crude oil availability and has a significant impact on crude oil price volatility

Unpredictable / extreme weather events

Extreme weather events, such as hurricanes in the US can temporarily reduce global refining capacity.  Such reductions and speculation about availability of refined products arising from these incidents have resulted in volatility in refined product prices globally.

Seasonality Effects

Refined product prices are influenced by the seasonal change in demand for specific refined products in the major markets of the northern hemisphere, such as the US, Europe, Japan and mainland China.  In the northern hemisphere, the demand for diesel and  kerosene increases in the winter as the need to heat homes and offcies increases. The demand for gasoline increases in the summer as people tend to drive more. 

Market Speculation

Crude oil and refined product are traded on the open market and are therefore subject to market speculation, which impacts prices.  In recent years, there has increased interest in the oil commodities market with new market players, mainly from investment funds and hedge fund managers. This is believed to have added to the volatility of oil prices.

Currency Fluctuations

The world’s major crude oil and refined product market is traded in US Dollars.  Therefore, any change in the exchange rate between a country’s currency and the US Dollar will have an impact on the cost of purchasing crude oil or refined product. This concern is not as critical for Hong Kong as the Hong Kong dollar is currently pegged to US dollar but fluctuations in US Dollar do have impact on the final landed product cost.

Hong Kong is a small market. However, there are six oil companies operating over 170 petrol filling stations in the territory. Obviously the market is very competitive. Petrol stations of different oil companies are located in proximity that any changes in list price initiated by one oil company will be closely and quickly followed by others, and thus resulting in closely aligned list prices.

Shrinking market against falling demand

Fuel demand in recent years has been falling as more motorists who frequently travel across the border switch to low-price fuel from the Mainland. Against the shrinking market, discountd on the list prices for petrol and diesel, which are widely available and are significant in Hong Kong, have been increasing significantly as competition intersifies.

Price discounts and rebates

The list prices shown at the petrol filling stations are only “reference prices” only. Almost 95% of our customers are receiving different levels of discounts and rebates. For cash or credit card customers using diesel, they can receive HK$1.20 canopy discount (straight discount off the list prices) when they re-fuel at our stations.

For cash or credit card customers buying gasoline, Shell has offered Bonus Card with attractive Shell Fuel Rebate Scheme.  We also offer Shell Card to both private motorists and fleet customers via clubs and associations, as well as via our direct account management. Discount and rebate levels are comparable to market rate and are under constant review to remain competitive.

Hong Kong has adopted Euro V diesel specification since December 1, 2007, which is the most stringent standard amongst most countries in the Asia-Pacific. With such a small demand in Hong Kong market, no traditional refinery in the region is completely tailored to satisfy our need. Traditional refineries have to undergo special process to refine their crude oil in order to provide the high specification fuels to Hong Kong market. The stringent specification obviously helps the environment, but it also incurs extra cost for oil companies in Hong Kong.