Oil Prices Fell in Israel, but That Isn't the Whole Story at the Gas Pump

When one considers the fluctuations in oil prices, they must consider how such changes are fabricated.

Oil prices have plummeted, yet drivers mutter about evil conspiracies every time the price of gasoline changes - whether they go up ("thieves") or down ("why only 13%?!). Yet there is no cause to suspect the prices at the pump. Here's why.

Firstly, one must consider how the price of gasoline at the pump, which is subject to state regulation, is reached.

The price is set at the end of every month, based on a formula based on the most recent transactions conducted in the Mediterranean basin. (Don't grumble, just read on.) These include prices quoted in deals transacted in the Lavera oil terminal in France over the five-day period preceding the last two days of every month (the 23rd-28th of every month, for instance). (Get it?)

The average price of all deals transacted over these days, multiplied by the dollar exchange rate on the fifth day, plus costs of insurance, fuel and inventory costs for delivery to Israel make up the basic price of a liter of gasoline at the refinery.

This currently stands at only NIS 1.60 per liter for 95 octane gasoline.

"Well?" you may ask. How does the price at the pump reach NIS 5.49 (currently), or NIS 7 (in July)?

To the basic price at the refinery doors, add excise (fuel tax), which has ranged from NIS 2.30 to NIS 2.40 per liter in the past year.

Then, add the regulated profit margin for marketers, which has ranged from NIS 0.63 to NIS 0.68 per liter (readjusted every six months, based on prevailing profit margins in European countries), and then, add 15.5% for VAT.

As demonstrated here, the price of gasoline purchased from refineries constitutes just 30% to 40% of the overall price to consumers.

Other components (particularly taxes, which constitute a whopping 50% of the total price paid by consumers), remain unchanged.

As a result, fluctuations in the price of imported gasoline are reflected only in 30%-40% of the total price-at-the-pump. Likewise, a 100% increase in the global price of a barrel of oil does not result in a 100% increase in the price of fuel to private consumers. Here's a rough calculation as an example:

In January 2008, oil stood at $100 per barrel, and by July of this year it had soared to $140 per barrel (up 40%), and by October it had sunk to $70 per barrel (down 50%). Similarly, the price of gasoline at refinery gates (the basic price) increased from NIS 2.40 per liter in January to NIS 3 in July (up 25%), and then sank to NIS 1.60 per liter at the end of October (down 45%).

Some of you may have noticed that the price increase of oil per barrel as presented here was actually sharper than that felt here in Israel (40%, compared to 25% here). This is because, as noted, the local price is based on an average of deals transacted over the last week of every month. Although the price of oil peaked at $147.20 per barrel on July 14, 2008, Israeli drivers did not pay prices based on this peak.

To summarize, the NIS 5.49 you are currently paying for a liter of 95 octane gasoline, is composed of the following:

Purchase price per liter: NIS 1.66

Marketing costs: NIS 0.68

Excise tax: NIS 2.42

VAT tax: NIS 0.73

Now you know.