Oil prices have taken a hammering this week?

Not only this week, oil prices have taken a hammering for months now but as the great fall of China gathered pace on Monday the price of oil on international markets continued on their downward spiral.

What is behind the fall in prices?

Global oversupply and worries over the severity of the economic slowdown in China are to blame for prices not seen since early in 2009. As Tuesday dawned the price of a barrel of crude oil fell below $39.

Is that cheap?

Oh yeah, It is very cheap. This time last year a barrel of crude cost more than $80. In February 2013 a barrel of the same oil was $118 now. Going back a bit further, to July 2008 a barrel of oil cost $147 and all the talk amongst international investors and economic-know-it alls was what would happen when oil reached $200 a barrel. Then Lehman Brothers collapsed, the global economy tanked and prices plummeted.

Well cheaper oil has to be really good news for motorists, right?

You’d think so. But you’d be wrong. The price of a barrel of oil has fallen from $150 to just $40. In percentage terms, that is a fall of 73 per cent. However petrol prices have fallen from highs of €1.75 to a forecourt average of €1.40 today. That is a decline of just 20 per cent.

Hang on, does that mean that we are being ripped off?

Probably.

Those petrol station owning gougers, I knew they were gouging us.

Steady on now. They are not the ones you should be pointing the finger at. The AA has been tracking fuel prices for more than 40 years and has never seen "any evidence of price fixing" amongst petrol station owners. And several years ago the National Consumer Agency – as it was then known – carried out an exhaustive study of petrol and diesel prices and, similarly, found no example of price gouging.

So, what is going on? Who’s making the money from cheap oil prices on international markets?

The State is. Around 90 cent of a litre of fuel goes to the tax man while retailers get about three cent. Wholesalers and distributors share seven cent between them, leaving little more than 40 cent per litre to cover the cost of extraction, refining and transportation. It is a very different situation in the US where the tax on fuel is much lower allowing forecourt prices to more easily track prices on international markets. This explains why the average price of a litre of petrol in the US today is 70 cent or exactly half what Irish consumers pay.

So the tax man’s the winner?

Big time. As it stands in the Republic, the excise duty of fuel is levied on a per-litre basis and not as a percentage of the price, which means when the cost falls, the tax remains at the same level. VAT is charged at 23 per cent of the non-tax fuel price and does fall in line with other price falls.

So prices won’t fall then?

Ah they probably will. If oil prices stay low – which looks likely, you can expect petrol prices to inch down and a litre of petrol could easily drop below €1.30 in the weeks ahead.

There should be better news for domestic energy users as the lower oil prices mean that electricity and gas prices should not increase in the months ahead while cheaper fuel prices should ultimately lead to cheaper airline tickets too. Of course all this assumes that the markets will behave as anticipated and that is never guaranteed.