Follow-up to article on oil price hysteria

I am grateful to a correspondent “Gareth Wiltshire” for pointing out a possible reason for the increase in the gap between the prices for diesel and petrol and the Brent spot price shown in the third graph in my article on oil price hysteria.

His argument is that the ex-refinery market prices of diesel, petrol and kerosene have followed relatively similar paths over the last decade, so that the increase in the ratios for diesel and petrol but not kerosene cannot be due to differential trends in the refining margin.

To explain what has happened it is necessary to look elsewhere. And, indeed, there is a factor that I had not thought about – the obligation imposed on suppliers to include an increasing share of “renewable” products in what is sold to the public. This is a classic and increasingly expensive form of hidden taxation on the use of diesel and petrol.

Let me take a step back. My intention in presenting the graph was to show that over the last decade the increase in the prices of petroleum products paid by final users was heavily influenced by domestic policies rather than changes in the world price of crude oil. Focusing attention on changes in “world” prices to explain changes in domestic prices is a convenient way of shifting the blame for the consequences of domestic political and economic choices.

We see that all the time in the electricity sector when “world” gas prices are blamed almost every week for rises in higher electricity prices, even though, as Irina Slav has forcefully pointed out on her Substack, there is no such thing as the “world gas price”. Because of transport costs, gas prices are highly regional. Over the last three decades trends in gas prices have diverged sharply between North America, Europe and East Asia.

We should be clear: it is decisions made in Europe that have pushed up the traded price of gas in Europe since 2020. Further, it is decisions made in the UK which have pushed up the price of gas in the UK relative to the traded price of gas in Europe. This is not just a matter of pipeline supplies from Russia, but decisions (not) to explore and extract gas from both shale and offshore resources, and other decisions concerning the development of infrastructure to handle LNG imports and to buy supplies on long term contracts. Readers may differ in their assessment of the consequences of such decisions, but everyone should accept that there are significant consequences.

Each of the petroleum products examined is affected by largely unpublicised policies to increase the “renewable” content of fuels sold to final users. These policies are not only expensive but have been highly controversial at various times in the past. The reason is that all the policies involve the direct or indirect replacement of fuels refined from crude oil by fuels derived from plants whose production competes for land with food, thus pushing up food prices for everyone.

The best-known example is plant-derived ethanol – or bioethanol - which is used as a substitute for petrol. Bioethanol is mainly produced from sugar cane or maize (corn). The requirement to include a proportion of bioethanol in petrol is enthusiastically supported by agricultural interest groups in the US, Brazil and various other countries. That alone tells one that such regulations are yet another boondoggle designed to transfer money from consumers to both farmers and processors, though it is the latter who are the primary beneficiaries.

If you search for “bioethanol” on the internet you will find lots of sites advertising the use of bioethanol. Readers should bear in mind that this is just a massive boondoggle which involves putting a petrol-substitute in your fireplace or barbecue. This may be dressed up as a way of using waste materials, but it is no different from any other process that converts the sugars in various plants to produce ethanol or methanol or other alcohols.

The E10 specification of standard unleaded petrol in the UK contains “up to” 10% of bioethanol. In 2025 the typical cost of bioethanol in Europe was $128 per barrel (bbl) while ex-refinery price of gasoline was about $90 per bbl in January 2026.[1] Thus, the bioethanol content requirement added up $4 per bbl to the wholesale cost of petrol in the UK. This is less than 20% of the increase in the ratio of the petrol price to the crude oil price that occurred over the decade up to 2025.

The B7 specification of standard diesel in the UK contains “up to” 7% of biodiesel. The average European price of biodiesel was about $210 per bbl at the end of 2025, while the ex-refinery price of diesel was about $83 per bbl. Thus, the biodiesel content requirement added up to $9 per bbl to the wholesale cost of diesel in the UK. This was more than double the addition for petrol, but it was still only a third of the increase in the ratio of the diesel price to the crude oil price that occurred over the decade up to 2025.

Currently, there are no requirements for renewable fuel content in heating oil/kerosene. A direct substitute – HVO or hydrotreated vegetable oil – is being tested. It is produced from waste fats and vegetable oils. The idea that it can substantially replace kerosene seems absurd as the amount of the waste oils required is much too low. If this route were followed, the inevitable outcome will be the direct conversion of vegetable oils to HVO, which will push up the prices of vegetable oils such as rapeseed oil (canola or colza) and other seed oils.

In summary, the introduction of and increase in renewable content regulations for petrol and diesel have increased the margins between retail prices excluding duty and VAT and spot prices for crude oil. Still, based on current costs, this factor cannot account for more than a third of the total increase in the margins over the last decade and in the case of petrol closer to one-fifth of the increase. That leaves an unanswered question: what factor or factors could account for the remaining 67% to 80% of the increase?

My suspicion, which is very hard to test, is that the reduction in competition because of the closure of refineries and the withdrawal of many companies from the market may be an important element of the story. The reason that it is hard to test is the increase has occurred progressively over the decade, not as a sudden jump that might be associated with a particular change in the number of competitors in the market. What has happened is consistent with a gradual reduction in the amount of competition as well as other changes in the way that the market functions.

This is a matter that I may return to in another article.

[1] The refining margin for gasoline varied between $20 and $30 per bbl for most of 2025 but spiked at over $40 per bbl in November – see https://www.neste.com/investors/market-data/oil-products#european-diesel-prices. This volatility the danger of drawing strong conclusions from short-term market data.