Do Petrol Retailers Price Gouge During Oil Price Spikes?

Price Spikes Don’t Necessarily Mean Profit-Taking by Petrol Retailers

Recent spikes in oil prices, triggered by the US-Israel strikes on Iran in late February, have reignited concerns about “price-gouging” at the petrol pump. While Chancellor Rachel Reeves in the UK has asked authorities to remain vigilant for profiteering, emerging research suggests retailers may not be capitalizing on consumer anxieties to the extent commonly believed. Instead, evidence points to a compression of retailer margins during periods of rapid price increases.

Analysis of the period following Russia’s full-scale invasion of Ukraine in February 2022, a similarly significant shock to global oil markets, reveals a distinct pattern. Wholesale fuel prices closely tracked crude oil price changes, with roughly 80% of oil price fluctuations reflected in wholesale costs within days. However, retail prices at the pump adjusted much more slowly and smoothly. During periods of sharp wholesale increases, pump prices rose by less and with a noticeable delay.

For example, at the peak of the price shock following the invasion of Ukraine, wholesale diesel prices surged by approximately 39 pence (89 cents) per litre, while retail pump prices increased by only about 16 pence (36 cents) per litre. This disparity suggests that retailers absorbed a significant portion of the increased wholesale costs rather than immediately passing them on to consumers.

This behavior isn’t necessarily altruistic. Researchers from the University of Warwick suggest that increased consumer awareness plays a key role. Data from price comparison site PetrolPrices.com showed a dramatic increase in search activity when average petrol prices exceeded £1.50 per litre in 2022. This indicates that consumers actively sought out cheaper filling stations when prices rose, intensifying competition among retailers.

The study found that increased search activity correlated with a reduction in local area petrol prices. Stations that had previously charged higher prices were most likely to lower their prices in response to heightened consumer price sensitivity. This suggests that retailers respond to increased scrutiny by moderating their markups, particularly those already operating with higher margins.

However, the relationship isn’t symmetrical. While retailers may compress margins during price spikes, a pattern known as “rockets and feathers” emerges when prices fall. Retail prices adjust downward more slowly than wholesale prices, temporarily increasing retailer profits. Over time, this asymmetry means consumers may end up paying slightly more than they would if prices adjusted evenly.

The research indicates that the issue isn’t necessarily excessive profits during price increases, but rather a slower reduction in prices when wholesale costs decrease. This effect varied between stations, with some passing on cost savings more readily than others. The study suggests that concerns about excess profits are more likely to be warranted when oil prices are falling, not spiking.

the evidence suggests that petrol retailers do not appear to be actively profiteering during periods of rapidly rising oil prices. Instead, they often experience squeezed margins as they navigate increased consumer awareness and heightened competition. As geopolitical tensions continue to influence global oil markets, and consumers remain sensitive to fluctuations at the pump, understanding this dynamic is crucial for both policymakers and motorists alike.