Dr Nikhil Datta on excess profits are being made at the pumps – but not when you think

• No evidence that UK petrol retailers exploit oil price spikes to widen margins, but new research shows clear evidence of margin expansion when prices fall, due to slower retail price reductions.

• If concerns about “overcharging” are warranted, the evidence suggests that it is more likely to occur during periods of falling oil prices rather than during price spikes.

New analysis of fuel prices confirms a long-held suspicion – at times of crisis when wholesale oil prices rise, prices at the pump also rise quickly – but they are slower to match any subsequent fall.

This so-called “rocket and feather effect” has been confirmed by economists Nikhil Datta and Johannes Brinkmann at the University of Warwick using more than ten years of pump price data.

Are consumers paying more as a result?

Analysis of the impact on petrol prices of Russia’s full-scale invasion of Ukraine in 2022 showed that when wholesale costs fall, pump prices adjust downward more slowly, temporarily increasing the gap between wholesale and retail prices.

On average, if wholesale prices rise by 10 pence per litre and then fall by 10 pence per litre over a 60-day period, consumers pay about 1 pence per litre during that period than they would if retail prices adjusted symmetrically.

Dr Nikhil Datta, University of Warwick, said:

“This is not the same across all petrol stations – in some locations price falls are passed on at the same speed as price increases, implying little additional cost to consumers. For others, it is up to five times larger, meaning that the same 10 pence per litre increase and subsequent decrease over a 60-day period would cost consumers up to an additional 5 pence per litre.

“Public concern tends to focus on price rises but in fact excess profits are more likely to be seen when prices start to fall” Dr Datta explains.

“In a well-functioning market prices would rise and fall symmetrically. What we actually see in the data is a quick rise, which draws the attention of politicians and consumer champions – but during this period, while wholesale fuel prices track crude oil increases almost immediately, retail pump prices rise more slowly and by a smaller amount, causing margins to compress, not expand.

“Profit margins expand after the crisis has passed when prices start to slowly drift back down.

“It’s during this period when focus from consumer champions and competition authorities would be most useful.

“Motorists can also help themselves by shopping around and using price comparison sites – we find that an increase in customer price checking during oil price spikes leads to stronger local competition and a downward pressure on pump prices.”