Is Fuel Really Cheap? Exploring the Confusing Truth Behind Fuel Prices
The reasoning behind the widespread belief that gasoline is affordable and justifiable. - Reason behind widespread perception of gasoline as inexpensive.
You might be surprised to hear that despite fuel prices being quite low now, many people still consider it cheap - and for good reason. Let's delve into the intricacies that make this an ongoing debate.
The Numbers
As of recent months, the average price of Super E10 in Germany, according to the ADAC, was 1.68 euros per liter. Meanwhile, diesel cost 1.56 euros. Albeit less than the average for 2024, these prices are significantly lower than the years 2023 and 2022, when both fuels temporarily surpassed the two-euro mark. Now, you might be thinking, "If fuel prices are lower than they were five years ago, isn't it cheap?" Let's investigate further.
Looking back to 2020, fuel prices fell below one euro at times. At that point, both fuels were more than 40 cents cheaper than they are now. However, is this comparison fair? Well, not necessarily, as it overlooks inflation. Considering the price increase of cars, bread, or even dining out, current fuel prices sit comfortably in the middle when adjusted for inflation. In fact, according to this calculation, diesel would have been more expensive in 12 out of the past 25 years, and gasoline in 18.
The Whole Picture
Fuel prices are unique compared to many other goods because they aren't immune to fluctuations. To understand why, we need to break down the components that make up fuel prices: oil prices, taxes and levies, and processing and distribution.
- Oil Prices: Oil prices are primarily responsible for the fluctuations. Over the past five years, oil prices varied between around 100 euros and less than 40 euros per barrel (159 liters). However, it's challenging to determine the exact proportion of the oil price in a liter of fuel due to the various products derived from oil.
- Taxes and Levies: The state takes the most significant share, with energy tax, VAT, and CO2 tax accounting for the majority. Energy tax, relatively constant since 2003, makes up around 105 cents for super and 86 cents for diesel. VAT plays a minimal role in price development while the CO2 price, though gradually increasing, is still manageable at 13 cents for gasoline and just under 15 cents for diesel.
- Processing, Distribution, and Profit Margin: The rest of the fuel price goes to processing, distribution, and the profits of mineral oil companies. These costs may rise as wages, energy, transport, and similar expenses become more expensive. Nevertheless, this portion is smaller compared to taxes and levies.
Expert Opinion
"While fuel prices are on track to make 2025 the fourth most expensive year for filling up, it's not as dramatic when we factor in inflation," says Christian Laberer, fuel market expert at the ADAC. "There's still room for prices to drop, particularly in wholesale margins and at refineries. The Ukraine war has caused significant disruptions, and a large amount of money is still stuck there compared to pre-war levels."
But why does fuel still feel cheap to some? Laberer attributes this to a phenomenon called "anchoring." He explains, "people get used to certain prices, so even during much higher prices, current prices may seem affordable by comparison."
Factors Influencing the Perception of Fuel Prices
- Psychological Pricing: Consumers tend to use past prices as a reference point, and current prices may appear cheap if they are less than recent highs. Additionally, people focus more on the perceived value of fuel as a necessity instead of the actual price.
- Economic Factors: Factors like income growth and consumer spending can affect how people perceive fuel prices. If income is rising faster than inflation or if inflation is affecting other sectors more severely, fuel prices may not seem burdensome.
- Consumer Habits and Context: Frequent travelers or those with fuel-efficient vehicles may perceive fuel as cheap due to lower overall expenditure. Comparing fuel prices to other transportation costs can also impact perceptions.
- Social and Environmental Factors: Environmental concerns can influence consumers' attitudes towards fuel, with some opting for more sustainable options despite the cost. Social norms and peer attitudes also play a role in shaping perceptions.
- The ongoing debate over whether fuel is cheap or not can be attributed to the comparison of current fuel prices with the historical highs, as well as the inflation-adjusted costs, which reveal that fuel prices have stayed relatively consistent.
- The perception of fuel prices being cheap is often anchored by past prices, with individuals perceiving current prices as more affordable when compared to recent highs, even as they contribute a significant portion to household expenses.
