Irish News
Margins under pressure
“When we started in this business in 1984, the price of oil from our
suppliers changed once a month which was the norm throughout the
industry,” said Pat Nevin, Jones Oil.
“In the future I expect to see fewer but larger players in the oil distributor
business,” Pat Nevin told Irish correspondent, Aine Faherty
“But over time oil refiners decided in their wisdom that this was too
long to wait if the price was rising, so changes then became fortnightly,
weekly, twice weekly and now daily.
“The effect of this trend was to put price to the forefront of
everyone’s mind, with an inevitable adverse impact on margins for
everyone in the supply chain.
“Part of the response to falling unit margins was to try to increase
volume to compensate. This led to refiners and importers supplying more
and more distributors as well as encouraging more new entrants into the
market; a strategy which contributed to a further decline in margins.
“Perhaps this trend was inevitable in a commodity market with
barriers to entry being set so low. With a high value product and
low margins, concern about risk and the ability to pay for the oil will
influence more and more decisions by refiners and importers.
“In the future I expect to see fewer but larger players in the oil
distributor business, with success linked to the ability to buy from several
different sources on an ongoing basis.”
“The market in Ireland over the last few years has been a challenge
with margins under pressure,” said Paul Leahy, manager direct business,
Valero Marketing Ireland
“While this colder winter has given the industry a boost, we
anticipate that this will be short-lived. Even in this tough trading
environment, Texoil has continued to grow its business and the first two
new vehicles from this year’s order arrived into our fleet in January.
“Brexit continues to be a concern with the outcome unclear until a
final negotiated position has been reached. But despite this uncertainty,
we will continue to invest in our business and look forward to the future
with optimism.”
Thanks to Patterson Oil for their speed in responding to
a request for a snowy tanker photograph.
‘Whilst the cold winter has given the industry a boost’, Valero Marketing
Ireland ‘anticipate that this will be short-lived’ – see above.
Inside Out continued from page 13
to the changing environment as it starts
to prepare the country’s economy for the
challenges posed by an age of abundance.
Past experience suggests that such deep and
lasting economic diversification can be a long
and challenging process…..
What will determine oil prices over the
next 20-30 years?
The traditional methodology around oil price
determination is based on the assumption
that oil is a finite resource. In such a model
oil commands a premium over and above its
immediate economic value, but in an age of
abundance this assumption no longer applies.
So, what will determine oil prices over the
next 20-30 years as we move from (perceived)
scarcity to abundance and global oil markets
become increasingly competitive?
The cost of producing ‘the marginal
barrel’? In 2016 the IMF estimated this to
be average around $10 per barrel for the five
major Middle Eastern producers.
The focus on extraction costs ignores
the fact that many of the world’s major oil
producers depend on oil revenues to finance
other aspects of their economies such as the
‘social costs’ of health, education, public sector
employment etc. Consequently, the oil price
needed to maintain the political and economic
structure of these economies is far higher than
simply the physical cost of extraction.
The prevailing market price will not
necessarily always be sufficient to cover social
costs. However, in addition to physical costs,
social costs need to be considered as they will
have an important bearing on where oil prices
stabilise in the long run.
Taking the fiscal break-even price as the
closest ‘proxy’, for the major Middle Eastern
producers, the IMF assessed this to average
around $60 per barrel in 2016. The size
and persistence of these social costs have
potentially important implications for the
sustainable level of oil prices over the next
20-30 years. Consequently, the level of oil
prices over the this period is likely to depend on
the oil producers’ success in diversifying their
economies, and reducing their social costs of
production.
It seems likely that many low-cost
producers will delay the pace at which they
adopt a more competitive higher volume, lower
price strategy until they have made material
progress in reforming their economies. It
seems unlikely that oil prices will stabilise
around a level at which many major oil
producing economies are running large and
persistent fiscal deficits. The average level of
oil prices over the next few decades is likely to
depend more on developments in the social
cost of production than on the physical cost of
extraction.
This presents OPEC with a particular
dilemma when deciding future production
quotas/levels…
Fuel Oil News | March 2018 19