Price of fuels

A guide provided by Galp to clarify all issues about gasoline and diesel prices in Portugal.

The price of gasoline and diesel in Portugal depends essentially on five variables:

  • The ex-refinery product price, which corresponds to international prices quoted for the respective product;
  • Euro/dollar rate;
  • Incorporation of biodiesel (in the case of gas oil);
  • Cost of logistics: transport/storage/distribution/marketing (which includes margin);
  • Taxes: VAT (Value-Added Tax) and ISP (Tax on Oil Products).

The following figure shows the different components of the price of gasoline and diesel in Portugal and their contribution to the final sale price:

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The sales prices of gasoline and diesel exiting the refinery on a weekly basis reflect the trend of average diesel and gasoline prices on the European market, compared to the average price the previous week. These prices depend more on the confirmed demand at each moment for each of these products and the price provided by the refineries, than the prices for Brent.

Prices are set in dollars, so a devaluation of the European currency in relation to the American currency will require more Euros to buy each litre of fuel. Similarly, a Euro appreciation may translate into lower prices at the pump even if, in dollars, the price remains unchanged.

In the case of diesel, the product price also reflects the price of biodiesel, which is compulsorily incorporated, and which is regulated by the State and fixed monthly. This translates into a price increase, unlike in Spain, where companies that produce biodiesel compete with each other.

The costs of all the logistics necessary to take the product from the refinery door to the service stations are added to the price of the product. This logistics component comprises transport, storage and distribution costs, as well as the sales margin. All in all, this slice represents 9.7% of the diesel price, and 8.4% of gasoline.

The largest share of fuel prices is the tax burden (VAT and ISP). This factor is different from country to country and almost entirely explains the price difference between Portugal and Spain. In the Portuguese case, the tax burden constitutes almost half the final price of diesel and more than half the price of gasoline.

Pre-tax gasoline and diesel prices do not depend solely on the price of the main raw material. Diesel and gasoline have their own markets and their prices are influenced by several factors, many of them exogenous to the European market, such as peak demand for diesel during the driving season in the United States, or Asian market trends (China and India) which have a distinct effect on the final price of Diesel and gasoline.

Therefore, these products have their own prices which do not always coincide with those for crude oil, and which are often divergent in the short-term. In Portugal, prices at the pump reflect the average trend of prices during the previous week, and often this weekly trend is different from the price of Brent on the day that the retail sale price is updated.

As already stated, oil and its derivatives are priced in dollars and it is necessary to incorporate fluctuations in the Euro/dollar exchange rate when relating its price to that of fuels.

In addition to the fact that crude oil is not the appropriate benchmark for analysing fuel prices - but the actual prices for diesel and gasoline - the main reason is that a price drop or rise is reflected only in the price relative to the price of the product. This, as already explained, represents less than half of the final price of diesel and just over one third the total price of gasoline. The share of the tax on petroleum products (ISP) does not change with this price variation, and the same applies to logistical costs.

In a scenario that is purely illustrative, let us imagine that in a litre of gasoline at the price of €1.5, half of the value is made up of taxes. If the part corresponding to the product, that is, 75 cents, fell to half, that would translate into a drop of 37.5 cents. That is, a fall of 50% in the value of the product would correspond to a reduction of only 25% of the final price.

It remains to be said that in reality the component that depends on international prices is much lower than 50%, so the difference between the drop - or rise - of the price and its effect on the final retail price to the public is even greater. This phenomenon, being purely arithmetic, is equally valid for price decreases as price increases.

No. Retail prices in Portugal are relatively in line with the European average, especially in the case of the most consumed fuel in Portugal, diesel. Before taxes, prices in Portugal are at the level of prices in markets with characteristics similar to ours, such as Greece, Italy and likewise the Spanish market.

Even so, consumer prices are not among the highest, and they are often below the European average, especially in the case of diesel.

When comparing the price of diesel in Portugal with that of other European countries, it must also be considered that the incorporation of biodiesel reflects an additional cost of around 2.8 cents/litre (1), a value that is regulated and fixed by the Portuguese State.

A weekly comparison of prices in several European countries can be found here.

(1) Value resulting from the application of Regulatory Ordinance 41/2011, of 19 January

The gasoline consumed in Portugal is mostly from the Sines and Matosinhos refineries. Nevertheless, some operators in the market are supplied by their own refineries closer to the border or imported from other countries.

In the case of diesel, the conclusion of the conversion project at the Sines and Matosinhos refineries has enabled Galp not only to produce enough diesel to supply the entire national market, but also to make it one of the main national export products.

The fuel market is global and highly integrated in the Iberian Peninsula. Galp holds 20% of the refining capacity in the Iberian Peninsula, and all operators in Portugal can supply from refineries near the border (such as Coruña or Huelva) or can easily import fuels from outside the mainland.

The price of fuels leaving the refineries follow international rates, as these products are quoted on the stock exchange. Any attempt by a refiner to raise the price unjustifiably would be quickly offset by imports from other sources. And if, on the contrary, they forced down prices at the exit from the refineries, the various distributors and even Galp's competitors would seize the opportunity to buy the product in large quantities to sell it in the markets where they obtained higher margins, appropriating Galp's efficiency gains without any benefit to consumers in the Portuguese market.

Therefore, no refiner, much less a small refiner on a European scale such as Galp, is able to dictate prices. The prices of products purchased by Galp from the refinery for distribution in its own network are the same as for any other market operator.

The difference in prices is explained in full by the tax burden in Spain, which is much lower. While in Portugal ISP and VAT account for more than half the price of gasoline (c.52%) and about 43% of the price of diesel, in Spain taxes represent only 46% and 41%, respectively.

In addition, in the case of diesel, the incorporation of biofuels represents a cost of 2.8 cents per litre in Portugal (value at 26/03/2012), a price that is regulated by the State, and a cost reduction of 1.2 cents per litre in Spain, making the comparison even more burdensome (the cost to the consumer in Portugal is around 4 cents per litre higher than in Spain only because of the impact of the biofuels component).

This is a belief that does not correspond to reality. Prices between different operators vary frequently and are different even within the same network, whatever the brand. Galp's prices are fully competitive with the competition.

The price difference between different stations depends above all on the reality of each local market. It is there that prices are set, according to the cost structure of each station, the volumes sold and the price policy of each operator, because many of the Galp branded gas stations are owned or operated by independent dealers. The cost structure of each service station is decisive in the final price and varies according to the rents paid - which are higher on motorways, for example - with the level of services, opening hours, location and many other factors. In recent years the market has evolved to reflect these realities in a local logic. Galp has followed this trend and it is for this reason that you can find different Galp sales prices in different stations depending on the market in which they are located.

The prices charged at all stations in the country can be found on the DGGE website.

Fuels sold in hypermarkets are not the same as those sold at Galp's stations. Although the base product is the same, Galp introduces a number of additives that improve engine performance, protect the equipment and emit less pollutants.

In addition, as the distribution of fuels is not the main business of hypermarkets, they are able to forego margins at the gas stations, using fuels to attract more customers to their stores.

Galp is made up of several business areas that react differently to the same economic forces. In the case of refining and distribution, the trend of rising fuel prices is reflected in a drop in demand, negatively impacting the results of this activity. Other areas, such as oil production, are affected positively, which facilitates a general balance in the accounts. This is the reason for not being dependent on the economic conditions at any given time - which explains the strong commitment made by Galp to diversify its business, not only in the area of Exploration and Production referred to above, but also in the introduction to Portugal of natural gas, which is now also a factor promoting stability in the company's results.

In the context of economic difficulties such as those current, the rise in the price of crude oil has negatively affected Galp's refining and distribution area, both in terms of demand for petroleum products and refining margins.

How are fuels priced in Portugal?

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