Crude vs. refined

30/11/2012 - Industry insights

Most New Zealanders don’t understand how this industry works, which is hardly surprising given the way it has communicated in the past. As a result, there are a number of myths and misconceptions in the minds of consumers, not least around pricing and profitability. We want to ensure there is more transparency and understanding around this topic.

In the August 2012 edition of the energy drop, we told you about what makes up the price of a litre of fuel.

We pointed out that our prices are based on the cost of finished petrol and diesel on the international market. Crude oil is an influencing factor, but our pump price is primarily set based on the price of finished or “refined” petrol and diesel on the Singapore market. People don’t often realise that crude oil, petrol and diesel are all independently and internationally traded commodity products. They often move roughly along the same lines but not always, as each product has slightly different supply and demand drivers. This is why if the price of crude drops, it doesn’t necessarily mean the price you see at the pump will also drop.

For example, the US summer driving season tends to push up demand for petrol, and the more something is in demand, the higher the price. But this won’t necessarily affect the price of other fuels you get from crude, so the price of refined petrol could go up markedly while the price of crude remains unchanged or only increases slightly.

Roughly 60% of the petrol we sell in New Zealand is imported as crude from the Middle East and South East Asia. 10% comes from the coast off Taranaki and both are refined at Refining NZ at Marsden Point. The rest has to be imported as already refined product which we currently source from South Korea.

Refining NZ is an NZX listed company, in which we have a 17% shareholding. We pay them a fee to refine crude into the products we want, which is referred to as the Gross Refining Margin (GRM). This fee is set based on the price of the refined products (such as petrol, diesel, jet fuel and so on) on the international market. So the cost of refining/producing petrol for example, basically moves up or down depending on the difference between the price a barrel of crude oil is trading for, and the price a barrel of petrol is selling for, minus the cost of the of the additional materials (referred to as “feedstock” such as naptha) that is required to make finished petrol. 

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