I thank the committee for the chance to speak on what is, by any definition, a somewhat unusual day in the Oireachtas. I represent AA Ireland, which is the country's oldest and largest motoring organisation, providing motoring services to a membership that now exceeds 400,000. We also play an advocacy role and always have done. We seek to influence public policy on matters that affect motorists and to give a voice to ordinary car users on subjects such as public transport, road safety, motoring consumer issues, motoring taxation and the environment.
Among other things, AA Ireland monitors the retail price of petrol and diesel in Ireland monthly and has done so ever since price controls were lifted in October 1991. We do this in a simple way. By using a combination of our nationwide rescue fleet and telephone surveying we obtain prices from a statistically significant number of service stations around the country during the second week of each month. Those figures are then used to generate an average price for the fuels, which we publish, and over time this provides a definitive index of fuel price movements. That index is relied upon by commentators and industry analysts.
There is a fair amount of detail in any analysis of how petrol and diesel prices are arrived at. There are three main factors, all of which are outside Ireland's control. These are the international price of crude oil, the exchange rate between the euro and the US dollar, and the price of gasoline and auto diesel when brokered on world markets as commodities in their own right. While we do not claim to have a depth of knowledge as to how the international currency and commodities markets work, we know from years of empirical observation that there are clear patterns to be seen. All other things being equal, when the price of oil rises on world markets it takes about four weeks for that rise to appear at Irish service stations. That is about the length of the supply chain. Hence, when we make predictions about what is going to happen to fuel prices we can be fairly accurate up to about a month in the future, but not beyond.
The prices of petrol and especially diesel have risen sharply in the last month. Petrol now costs an average of 120.2 cent per litre, up by 3.3 cent since February. Diesel rose more sharply by 4.7 cent per litre to an average cost of 122.2 cent in the last month. We can partly understand this, but the diesel figure is a serious concern. World oil prices are rising again and touched $111 per barrel recently before falling back. This means that there is no prospect of the cost of fuel coming down significantly for at least the next month or so. In fact, had the value of the euro not been so strong against the dollar, the effects of high oil prices would be even worse. However, we have expressed serious concern at what appears to be a disproportionate rise in diesel prices. When we last made a public statement on this issue a month ago we challenged the oil industry in Ireland to be more open in its pricing and to provide clear explanations as to where these increases originate. It should be put on record that we received an excellent degree of co-operation from the industry in our attempt to get information and to understand what is going on.
In terms of price movements, obviously both petrol and diesel derive from crude oil and one would expect the price of both fuels to move in parallel in response to oil price changes. However, there are differences. Gasoline and auto diesel are both brokered on world markets as commodities in their own right and there are seasonal variations. In the northern hemisphere winter, and especially if it is a cold winter, the relative demand for diesel increases. This is because private car driving tends to be reduced and because diesel is essentially the same as home heating oil. The opposite is also true. Brokers refer to the northern hemisphere summer as the "gasoline season" because driving mileages increase, especially in the US, and the relative price of gasoline increases in the summer. The practical effect of this is that diesel tends to be relatively cheap in summer and relatively expensive in winter. Our index of average retail prices over the years reflects that seasonal variation. The seasonal effect is usually gone by February, but this year is an anomaly in that regard. The graph in my submission clearly shows that every winter petrol and diesel prices are close, while every summer diesel is cheap.
We have a major concern from the consumer's point of view since the number of diesel cars on the road is set to increase dramatically because of the change to the CO2-based taxation system which will be a big driver of this. In Ireland at the moment only about 18% of private cars are diesel, but we expect that figure to grow rapidly as diesel cars score much better in terms of emissions. In Germany, more than half of all private cars are diesel, while in Luxembourg three-quarters of private cars are diesel. At the start of 2007, Norway made tax changes similar to ours and they have already seen sales of diesels double. Finland also has made similar changes, so right across the continent diesel is becoming the cleaner, greener fuel of choice and that trend definitely is set to continue. The worry for us is that a creep in diesel prices will affect environmentally conscious consumers. Also, the motoring consumer tends to be cynical about oil companies. There is a great deal of suspicion in the minds of ordinary motorists when it comes to how fuels are priced. Every day I get phone calls from motorists who have conspiracy theories about what the oil companies are doing. I myself have been quite cynical in the past.
In trying to analyse what has been going on, we have been looking at world fuel markets and I have spoken also to my opposite numbers in other countries. The AA is part of a pan-European and worldwide network of AA-type clubs and I have been asking that network about what has been happening in their countries. One thing is certain: the rise in diesel prices is not just an Irish phenomenon. The same is happening right across the continent. I have spoken to the clubs in Norway, Sweden, Denmark, Britain, Holland, Germany, the Czech Republic, France, Spain and elsewhere. Everyone is seeing the same thing: diesel is far more expensive, relative to petrol, than we have seen before. The question is why.
The most likely explanation begins in the United States. The US is the major consumer of petrol, accounting for more than 40% of world consumption of gasoline. In the past seven or eight months the US oil industry essentially made a strategic choice to devote a larger portion of refining capacity in the Gulf of Mexico to gasoline production relative to diesel. They take capacity gambles every year. In a sense they took a gamble, betting on high gasoline demand, but in fact that bet went the other way. Consumer demand for gasoline in the US was sharply down this winter and that has left the industry in the US with a large stock overhang of gasoline.
In the United States, it appears that gasoline inventories are at their highest levels in more than ten years, partly because the economic slowdown is denting demand. In contrast, distillate inventories, which include diesel and home heating oil, are down on last year's levels both in the US and Europe. So there is a relative shortage of diesel at European refineries and demand is running ahead of production. Figures from the Irish Petroleum Industry Association, IPIA, bear this out. Wholesale diesel prices in Europe based on international prices as of 10 March show that the base price of diesel, before all taxes and transport costs, is 57.46 cent per litre versus 44.77 cent per litre for petrol — a difference of 12.69 cent. There appears to be no sign of this pattern changing and the IPIA concludes that pump price differences of between six and seven cent per litre are likely in the near future.
It should be noted that less tax is charged on diesel than on petrol. Therefore, although diesel is more expensive to manufacture, the outturn cost is usually cheaper because of the tax differential here in Ireland. However, at the moment diesel is, relatively speaking, scarce and expensive. It is difficult to estimate for how long this will continue and I do not claim that my speculations are more valid than anyone else's. It is probably this stock overhang of gasoline that is affecting prices. With oil prices raging, although cushioned for us by the weak dollar, both fuels should be going up in price in parallel. In fact, however, only diesel is because of this global excess of petrol stocks. That does not look terribly convincing from the point of view of the motorist at an Irish service station but I do think that it is probably the true explanation.
I have had many calls from people who have been reading about oil prices moving. They arrive at the service station having just bought a diesel car to discover that, for the first time ever, diesel prices are far more expensive than petrol at a time when an increasing number of people are buying cars with diesel engines. They are putting two and two together and concluding that there is some sort of conspiracy and that the consumer is being fleeced. I do not think that is happening, however, and part of the proof is that it is not unique to Ireland. It is happening across the continent of Europe and beyond.
As to what will happen next, oil prices have fallen back a little off their €111 per barrel peak. If that does not change, my assessment would be that we are in for another month or so of static prices followed by a slight easing. Within the next two months or so the US gasoline season will begin and this should gradually use up the excess gasoline inventory. By summer, it is likely that the current anomaly will have worked its way through and we should have reverted back to the normal pattern with diesel retailing more cheaply than petrol. In the long term, the increased demand for diesel right across Europe may result in higher diesel prices overall. Pan-European policy is geared to promoting diesel use and it is inevitable that this will tend to lift prices.
That concludes my formal presentation which has been sent to the clerk by e-mail and is available to members. I will be happy to answer any queries that members of the committee might have. To put it in a nutshell, it appears that there is too much gasoline in stock in the United States. This is lowering world gasoline prices and there is a reciprocal shortage of diesel which is pushing up world diesel prices. It is happening everywhere, not just in Ireland.
