You probably heard it by now: Oil prices dropped to unprecedented low levels, reaching negative figures for the first time in history.
In fact, the last time this happened was around 150 years ago. You can see it in the chart below:
There are several factors contributing to this drop. COVID-19 is just one of them, but there is also a political reason (which we won’t be discussing). As a consumer though, the basic question that most people ask is, “Why doesn’t my vehicle’s fuel price crash as fast?”
Unfortunately, that is unlikely to happen.
Doing The Math
First of all, you need to understand that oil actually has several price references. These prices are derived from several oil price benchmarks, and despite the spectacular news flashes that many of us are seeing, it’s only the US benchmarks that dropped negative.
Also, oil is priced per barrel. One barrel is equivalent to 119.24 litres, which is far more than what your standard vehicle needs. Since we don’t fill up our car with an entire barrel of oil, let’s see how much we actually save.
Here, we’re using WTI Crude as our benchmark while all currencies are in US dollars:
Price of WTI Crude 2012: $80/119 litre = $0.67 per litre
Price of WTI Crude as of 23 April 2020: $15/119 litre = $0.12 per litre
The difference: $0.55 per litre.
With an average car fuel capacity ranging from 45-65 litres, a full tank would cost you $24-$35 less now than it did in 2012.
That’s, of course, if your car runs on crude oil.
Crude oil is black, thick, sludgy and full of compounds that will destroy your engine if used in its original state. Hence, refining oil is necessary. That means there are additional costs to account for: drilling, separation, refining, adding of chemicals processing, transportation and storage etc. By far, these costs are not as volatile as oil prices. In fact, they are likely subjected to rising costs of inflation.
When Oil is Not Oil
Oil prices reflected in the charts are not for the real oil dug from the ground, but are mostly reflective of the price for future contracts.
I won’t discuss such a complicated instrument in great detail here. In a layman’s gist, oil future contracts imply what people are willing to pay for crude oil at the end of a specific timeline, and not actual total cost itself. This price changes every minute, so it would be impractical for the end consumers to keep up. Imagine having the guy in front of you pump fuel at $1.50 per litre, but you are pumping at $1.70 because oil prices on the charts has gone up. You will definitely not be happy.
How You Still Stand to Benefit
Despite how prices are not drastically changing as you would like, you will see the benefit eventually. Oil prices in general have been seeing low costs for many months. Hence, you probably will be looking at lower fuel prices when the cost reduction trickles down the line.
Not only are fuel prices affected by oil price drops. Your electricity bill will also see a drop, as it less costly for power generators to run. Energy tariffs had already dropped in the first quarter of 2019. Most recently, SP Group has announced a significant drop of more than 5% for April-June this year.
All this cash savings puts additional relief to your cashflow, which you can put into relieving your monthly mortgage payment, especially if your income is severely affected by COVID-19.
Drastic economic changes like oil price fluctuations are never immediately felt. The effects usually happen for weeks or even months after. But the savings can do well for your finances. Take this opportunity to re-look into your mortgage instalments. With savvy management, you will notice opportunities to cut costs and grow your wealth in many places. Drop us a message to connect with us and see how we can help you.
About The Author
Shamir has more than 8 years of banking experience across various areas in Retail, Corporate and Private banking (including Islamic finance) for one of the largest banks in Southeast Asia. In Corporate Banking, he was involved in structuring loan transactions for real estate developers and REITs. He also worked with private bankers to provide credit solutions to their high net worth clients.