With oil prices in freefall due to the drop in demand caused by the COVID-19 outbreak, the price of fuel around the globe has also plummeted – with the exception of Malta. Here, petrol and diesel prices have remained ‘locked’ in line with government policy.
According to the weekly oil bulletin published by the European Commission, petrol in Malta is being sold at 18c higher than the EU average.
In the case of diesel, the disparity is of 13c5 per litre.
This means that, at present, Malta has the third highest price for petrol and diesel of the 27 member states.
One crucial difference which distinguishes the Maltese fuel market from the rest of Europe is that prices here are ‘locked’ for months under a government fuel hedging policy introduced by Labour shortly after it was elected in 2013.
Now, the price of fuel at the pumps no longer fluctuates on a regular basis in response to international oil prices. The government justified the move on the ground that it wanted to provide stability to the market, especially to enable businesses to budget for transportation costs over the long-term.
However, critics had warned the policy was risky, akin to taking a gamble. While it offers protection against a sudden spike in fuel prices, in another scenario it would backfire, not allowing consumers to benefit from cheaper fuel.
August revision
The last revision in fuel prices dates back to August last year when a flat 5c increase for petrol and diesel was introduced.
The price of petrol at the pumps rose to €1.41 per litre and that of diesel to €1.28.
This meant the price of petrol in Malta remained within the European average, if not marginally below by a few cents, while the price of diesel was consistently below the EU average by around 6c.
However, the COVID-19 outbreak has proven to be the policy’s Achilles heel. In a matter of weeks, it has thrown out of the window the gains that motorists had made in previous months.
The alarm bells starting ringing at the start of February when the global economic slowdown led to lower demand for oil, which in turn resulted in a sudden drop in fuel prices.
With no end in sight for the outbreak, the downward trend persisted and last week the price of oil fell to an 18-year low, dropping below $20 per barrel.
As a result, fuel prices in the EU dropped by around 15c per litre on a weekly basis.
In Malta the prices are still those of August last year, when the economic climate was dramatically different.
It is not known if an imminent downward revision of prices is around the corner.
This depends on the length of the existing hedging agreement entered into by State company Enemed, while the volatility of oil prices makes the situation even more complex.
While there could be a window of opportunity to hedge at the existing cheap prices, this is not the entire picture.
Producers are likely to demand a premium when negotiating long-term contracts to safeguard their interests and mitigate losses in case prices go back up.
Consequently, hedging at the current prices might not be so profitable, if the current crisis persists.