After Russia’s invasion of Ukraine in 2022, although consumers experienced higher fuel prices, retailers did not increase their profit margins. But why would retailers cut their margins when prices soar?
The US and Israeli attacks on Iran in late February triggered an immediate spike in oil prices, and volatility has only increased since then.
Fears quickly arose among motorists of “price speculation” — fuel retailers inflating prices to take advantage of consumer panic.
In the United Kingdom, the Minister of Finance, Rachel Reevesasked the Competition and Markets Authority (CMA) to remain in “maximum alert” regarding abusive practices by fuel retailers.
The industry association, the Petrol Retailers Association, reacted immediately, stating that the language used was “incorrect and inflammatory”.
But what does the economic evidence suggest about the behavior of retailers during periods of sharp fluctuations in oil prices?
As part of a study of UK fuel retailers and major oil price shocks, Nikhil Datta e Johannes Brinkmanneconomics professors at the University of Warwick in the United Kingdom, examined the large-scale invasion of Ukraine by Russiain February 2022.
The invasion caused a significant and sudden increase in prices global oil markets, providing a valuable context for analyzing how crude supply shocks have an impact on prices charged at the pumps of supply.
O first clear pattern What Datta and Brinkmann found was that changes in the prices of unleaded gasoline and diesel followed closely changes in crude oil prices. When oil prices rose, wholesale fuel prices increased almost immediatelythe two researchers explain in an article in .
According to the estimates of the two researchers, around 80% of the variations in oil prices are reflected in wholesale fuel prices in a few days.
Os Retail prices, however, react quite differently. Prices at the pump adjusted more slowly and presented considerably milder variations than wholesale prices. In periods when wholesale prices rose sharply, retail prices typically increased less and with a time lag.
At the immediate peak of the shock, in the weeks following the invasion, wholesale diesel prices rose by about 40 cents per liter, while pump prices only increased by around 18 cents per liter.
The implication is that Retailers’ margins have been squeezeds during price spikes, as the differential between retail and wholesale prices temporarily narrowed.
That is, although the consumers have felt higher prices in fuels, the evidence does not suggest that retailers have increased their profit margins during these periods.
But Why would retailers reduce their margins? When do prices skyrocket? One explanation is that consumers become more attentive fuel prices at those times.
Using data from price comparison site PetrolPrices.com, Datta and Brinkmann found that when the average price of gasoline exceeded £1.50 per liter in 2022, the Search activity has increased dramatically.
O growing number of daily searches indicated that consumers actively sought out cheaper gas stations when prices rose.
Exceeding the £1.50 threshold also attracted media attention, increasing people’s awareness and encouraging consumers to compare prices.
Using geographically detailed data on search activity, combined with daily fuel price data from virtually every filling station in the UK, Datta and Brinkmann were able to establish a causal relationship between this increased attention of consumers and the intensification of price competition.
As prices began to stabilize, they found that the intensity of searches on the price comparison site decreased. Research activity did not in itself return to pre-shock levels, but rather declined and stabilized at a higher level than beforewhich is consistent with the predictions of well-established economic models.
Correspondingly, the impacts on prices are mitigated over time. At the peak of search activity following the Russian invasion of Ukraine, a 10 percentage point increase in search activity was associated with an approximately 2% reduction in local gasoline prices.
Datta and Brinkmann later discovered that this effect was driven primarily by stations that already charged higher prices in January 2022. These stations with higher prices were the ones who reduced their prices the most as consumers became more price sensitive.
The study suggests that when oil prices rise and there is a lot of media attention, consumers dedicate more effort to looking for better prices. Competition then intensifies and puts downward pressure on retail prices.
Thus, retailers can actually register a reduction in margins when oil prices soar.
Altogether, Datta and Brinkmann’s conclusions point to a clear inference: fuel retailers do not seem to profit abusivelya during periods when oil prices are rising rapidly. On the contrary, its margins tend to be compressed.
If concerns about excessive profits are justified, the evidence suggests that This is more likely to occur when oil prices are falling than when they are shooting.
