Why the price of diesel isn’t falling in line with the excise duty cut

When the price of diesel exceeds two euros per litre, the first thing we look at is the price of oil. But between a barrel of Brent and a litre of diesel at the pump, there are at least three different prices: that of crude oil, that of the refined product, and the final price paid by the motorist.

The price of diesel leaving the refinery is not simply the price of crude oil plus the industrial costs required to process it. The benchmark for the European market is the Platts index. Platts tracks daily supply, demand and trading activity on the markets and determines a price that reflects the value of diesel and other refined products. It is a market price, not a production cost. If there is a shortage of diesel in Europe, the Platts index may rise even whilst the price of crude oil falls.

The difference between the value of refined products and that of the crude oil needed to produce them is, to put it simply, the refining margin, the famous ‘crack spread’. Last March, following the new crisis in the Middle East, European margins reached around 60–80 dollars per barrel, up to four times the levels considered normal.

The reasons are well known. In Europe, over the last fifteen years, several refineries have been closed down, deemed unprofitable (!) and destined to lose market share due to the energy transition. The wars in Ukraine and subsequently in Iran have reduced the availability of Russian and Middle Eastern refined products. When available capacity becomes scarce, the price of refined products can diverge significantly from that of crude oil. Then comes distribution, and on top of the Platts price are transport, storage, biofuel obligations, stockpiles, network costs and trade margins. Finally, the state intervenes with excise duty and VAT. The price at the pump is the result of all these factors.

This breakdown helps to explain why the government’s response risks being misguided. At the end of July, the government reduced the excise duty on diesel by 14 centesimi – approximately 17 when VAT is taken into account. The measure was then extended until the end of August to bring down the price for consumers immediately. Since March, nearly 2 billion has been spent. However, a tax cut only benefits the consumer in full if the rest of the supply chain does not simultaneously adjust its prices and margins. And the initial data raise some doubts.

Comparing the week of 20–26 July with that of 27 July–2 August, the tax cut amounts to around 17 cents. Meanwhile, the raw material component rose by 5.7 cents and the supply chain’s gross margin by a further 6.2 cents. Taking only the rise in raw material costs into account, diesel prices should have fallen by around 11.3 cents. Instead, they fell by around 5.1 cents. More than a third of the tax reduction was therefore absorbed by the increase in the gross margin.

This does not necessarily mean that anyone has broken the law. It means that, when supply is inelastic, reducing a tax does not guarantee that the full benefit will be passed on to the consumer; part of it may be absorbed by mark-ups along the supply chain. Before spending any more public money on excise duties, it would therefore be useful to gain a much better understanding of how those mark-ups are formed.

And here we come to an issue of industrial policy that Italy has underestimated: refining. We have regarded refineries as part of the old fossil-fuel world, destined to be scaled back. But an energy crisis reminds us that a refinery is also a strategic piece of infrastructure. And we have sold almost all of them abroad.

The most obvious example is Priolo, Italy’s largest plant. It used to belong to the Russian company Lukoil; in 2023, it was acquired by GOI Energy, a group based in Cyprus. In May this year, Ludoil reached an agreement to bring it back under Italian control, a transaction subject to the ‘golden power’ clause. However, it is understood to have exclusive commercial and financial agreements with one of the major foreign traders.

The ‘golden power’ should not merely be used to ask who is buying a refinery. The most important question is what we want to preserve: how much production capacity, what stocks, what investments and what guarantees of supply in the event of an emergency.

The energy transition makes it inevitable that oil consumption will be gradually reduced; it makes no sense to lose refining capacity before demand for fuels has been reduced. For this reason, the government should focus on publishing Platts figures and supply chain margins, request data on production and stocks, and use the ‘golden power’ to safeguard security of supply. Because today, the bottleneck is not necessarily oil from the Strait of Hormuz: increasingly, it is the capacity to process it into diesel and petrol. And if the diagnosis is wrong, the state may spend hundreds of millions on reducing excise duties, only to discover that part of the discount never reached the pump.