Decoding Petrol Prices: How Global Markets and Government Policies Shape Fuel Costs

The UAE is expected to announce September petrol prices on Monday as global oil markets remain volatile amid the nearly seven-month Iran war. Traditionally, petrol prices have moved in synch with those benchmarks, though this is not always the case. Several factors—including snow and river water levels—influence monthly fuel costs. While the mechanisms for setting these prices vary by nation, governments can also help control high prices at the pump.

Normally, crude oil and refined product prices are correlated. Giovanni Staunovo, a commodity analyst at Swiss bank UBS, explained that if crude prices outperform product prices, refinery margins deteriorate, leading to less demand for crude and fewer refined products produced, which brings both prices back in synch. Conversely, if refinery margins outperform, refineries try to maximize production to capture those margins, resulting in more available products and a reduced price difference.

“Currently, this is not the case, due to large disruptions on the refinery side. Due to disruptions in the Middle East, China and other countries in Asia and Russia, refinery runs are about five to six million barrels per day below the level of last year,” Staunovo told The National.

The UAE Way

Regulations in the UAE allow for an efficient method in determining pump prices. Fuel costs have been tied to the global oil market since authorities introduced deregulation on August 1, 2015. The UAE Cabinet at the time stated the move aimed at “supporting the national economy, lowering fuel consumption, protecting the environment and preserving national resources”. The UAE typically announces petrol prices for the coming month on the last day of the current one, with Saudi Arabia and Qatar following similar monthly reviews.

“The UAE sits between a fully market-driven system and a subsidised fuel market,” Joseph Dahrieh, managing director at brokerage Tickmill, told The National. “It allows international energy prices to influence consumers but the monthly review mechanism provides some smoothing, reducing the fiscal impact.”

On Wednesday, oil prices hovered near a one-month low amid apparent progress in negotiations to cool down the war in Iran, with Brent and West Texas Intermediate dropping by up to 3 per cent. For the week, they retreated nearly 7 per cent and 6.1 per cent, respectively. Month-to-date, Brent, the benchmark for two-thirds of the world's oil, fell 1.7 per cent, while WTI, the gauge tracking US crude, shed nearly 4 per cent.

Conventional wisdom suggests pump prices would follow suit, but that has not always been the case. In January, for instance, Brent posted a nearly 14 per cent monthly drop, yet pump prices in the Emirates still fell in February. Ahmed Zaheer, a consultant at Dubai-based Qamar Energy, explained that UAE petrol costs do not move in lockstep with day-to-day crude price swings. Instead, the mechanism uses a monthly, lagged, and benchmark-based pricing formula rather than real-time market adjustments.

“Instead of tracking spot crude prices directly, the [UAE fuel price] committee benchmarks against international averages for refined products [petrol and diesel, not crude] over the preceding weeks, with an approximate one-month lag factored in,” Zaheer told The National. A dip in global oil prices during a specific week does not appear at the pump until weeks later, and even then, it is diluted by other cost components or outweighed by changes in refined fuel prices, refining margins, distribution costs, and retail margins.

For example, if crude costs $90 a barrel and the diesel refining margin is $100 per barrel, the implied wholesale diesel value is $190 before freight, storage, blending, distribution, station costs, retail margins, and any taxes. Zaheer added that the price the public pays in August actually reflects average refined product market conditions from earlier in the summer, rather than the price of oil on the day of filling up.

Global Factors

In other parts of the world, additional factors influence pump prices. According to the American Petroleum Institute, US costs are primarily driven by crude oil prices, refining costs, distribution and marketing, and taxes. In Europe, refined product prices are strongly influenced by taxes and excise duties. Furthermore, Staunovo noted that river water levels play a role across the continent, where lower levels force ships to carry less cargo, driving up prices. One notable example is the Rhine, a vital trade artery flowing from the Swiss Alps through Switzerland, Liechtenstein, Austria, Germany, France, and the Netherlands before emptying into the North Sea.

In the UK, the winter season's snow and ice significantly slow tanker deliveries and increase fuel consumption, creating a “predictable yet painful reality” across the country, according to Lancashire-based logistics firm Future Fuels. Dahrieh added that prices in the US and most of Europe can change more rapidly while taxes constitute a larger share of the pump price, whereas countries subsidizing fuel may face budget strain during adverse crude price movements.

Government Intervention

Faced with high crude oil prices this year, some European governments have opted to cut taxes on the commodity, while others tap into strategic oil inventories to increase domestic supply, according to Staunovo. Dahrieh noted that governments can adopt various other mechanisms, each involving a trade-off between consumer affordability, government finances, and market efficiency. Aside from reducing fuel taxes and using strategic reserves, solutions include temporary subsidies, price caps, or compensating refiners and distributors.

However, Dahrieh cautioned that these measures do not eliminate the underlying cost, but merely transfer it from motorists to the government, refiners, or taxpayers. Zaheer pointed out that most countries find the most economically well-designed market-pricing system does not involve broad, universal petrol subsidies. Instead, an ideal approach combines an automatic transparent pricing formula, temporary tax adjustments or narrow stabilization mechanisms during exceptional shocks, and direct support for lower-income households and essential services.

Rather than reducing petrol prices by a set amount per litre for every driver, Zaheer suggested governments preserve market-linked prices while providing monthly mobility payments to eligible households and supporting public buses, taxis, and emergency services. This approach protects affordability without creating an open-ended incentive to consume more fuel, avoiding a complete disconnection from underlying market signals.