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Budgets pegged to last year's Brent price now buy 63% of the crude they planned for
Brent crude sat at $104.74 a barrel on October 7, roughly $38.60 above a year earlier, according to Fortune's daily price page. A fuel or input budget built on last year's price now pays for just under two-thirds of the barrels it assumed.
The Investor · Invest desk
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What happened
- Brent added $3.31 a barrel between the morning of October 6 and 7:15 a.m. Eastern on October 7, according to Fortune.
- Crude is the largest single part of a pump price, typically more than half of each gallon, with refining, distribution, taxes and station margin making up the rest.
- Fortune says pump prices rise quickly after oil spikes but ease down gradually when oil falls, a pattern it calls rockets and feathers.
- Fortune describes the Strategic Petroleum Reserve as a way to ease sudden supply-driven price jumps, and wrote that it is "not a permanent fix."
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Why it matters
- cost A company buying crude itself absorbs the whole gap at today's price, about $38,600 more for every 1,000 barrels than a plan set at last year's price allowed.
- exposure Natural gas budgets share the exposure, because Fortune says higher oil prices can lead some industries to switch parts of their operations to gas and lift demand for it.
- decision A reforecast now has to choose a Brent reference while the price is moving about 3% in a day, so a single morning's quote is a thin basis for a full-year plan.
Take the $38.60 off $104.74 and Brent cost about $66.14 a barrel a year ago [1] [3] [12], so the barrel now costs roughly 58% more [13]. A budget pegged to the year-old price buys about 63% of the crude it was written for [10].
A buyer paying for the barrel itself carries all of that gap. Fuel bought at the pump carries less, because crude is only a bit over half of the gallon [4]. If crude were exactly half of last year's gallon and nothing else in the price moved, the gallon would cost about 29% more [16]. Fortune puts crude's share above half, so 29% is a floor for that illustration, and any rise in refining or distribution costs would push it higher [4] [6].
If Brent holds near $104, a year-old crude budget keeps buying about 63% of its planned barrels [10]. If it gives back the overnight $3.31, the gap barely narrows, since that one day was under a tenth of the year's rise [2] [15]. A deeper fall gives crude buyers relief at once. Under the rockets-and-feathers pattern Fortune describes, pump buyers get theirs later [5].
I think the fuel line is the harder budget to repair, even with its smaller percentage overrun, because it stays short for longer after crude turns [5]. The counter-case is size. In the illustration above, the crude buyer's hit is about twice the pump buyer's [13] [16], and there are no taxes or station margins to dilute it [6].
Fortune's price page does not say what drove the move. The view fails for any buyer that fixed its price before the rise. It fails for everyone else if Brent returns toward $66 before budgets are reset [12].
What to watch
- Whether Brent holds above $100 in the next few daily readings or gives back the $3.31 it added overnight.
- Pump prices over the coming weeks, as a test of how much of crude's roughly 58% annual rise reaches the gallon and how slowly it leaves.
- WTI, the North American benchmark, for buyers whose contracts price off it instead of Brent.