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Key questions on petrol market

The Office of Fair Trading has reviewed the petrol market, looking at whether reductions in the price of crude oil are being passed on to motorists.

Here is a round-up of some of the issues surrounding the industry.

Q: Why are campaigners calling for a full investigation?

A: Campaigners have listed a number of concerns, particularly wanting to know how wholesale prices are calculated, why wholesale prices move and why it takes so long for falls in crude oil to appear at the pumps. The AA has also recently accused the industry of failing to pass on falls in wholesale prices to motorists as quickly as increases.

Petrol prices rose by 38% between June 2007 and June 2012, and diesel by 43%.

Oil firms including Royal Dutch Shell and Exxon Mobil have recently seen profits fall, respectively blaming it on lower oil and gas prices and a drop in exploration and production earnings. Some refiners improved their earnings by 129%, but they say most of their profit comes from exploration and production, rather than UK forecourts.

Q: What are the factors affecting oil prices?

A: The price of oil significantly decreased after the record peak of 145 US dollars in July 2008. But the high level of uncertainty facing oil markets has driven up prices, as has the rapid growth of economies in developing nations such as China and India.

Q: How can oil companies be making money from producing oil but not from selling it?

A: Competition on the forecourts drives prices down and oil companies argue that little profit is made at their garages. When crude oil is expensive the seller will see a rise in profits while the buyer will see a rise in costs. The companies say they make their money through crude oil exploration and production, the "upstream" part of the business, but not in refining and selling fuel, the "downstream" part of the business.

Q: But the companies own both parts of the business...

A: One part of the business is a customer of the other, but the companies are not allowed to decide their own internal price for crude oil. This would be illegal because not all companies operate both upstream and downstream and it would amount to one company subsidising another.

Q: Why do the oil companies not get rid of the downstream part of the business?

A: When crude oil prices are low the refineries and petrol stations can make money on the downstream part of the business, while the upstream business might lose money. When crude price falls, the exploration arm of the business is hit the hardest, with the petrol stations benefiting. The upstream businesses also have to reinvest some of their profits into searching for oil. This can be a risky venture and many projects fail.

Q: Why doesn't the petrol price fall when the oil price falls?

A: Refineries and petrol stations can make some money by letting prices fall slowly but rise quickly in response to crude oil price movements. Fuel duty and VAT currently amount to around 60% of the total price of fuel. Petrol stations have to buy the crude oil and pay refinery costs. Whatever is left over, minus any additional expenses, is profit.

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