Oil Market Report March, 2011

So the budget came and went and to no great surprise, the much vaunted fuel price stabiliser failed to materialise. In its place was introduced a rather clever piece of financial regulation, whereby the offshore tax levy for North Sea operators rose from 20% to 32% – subject to the oil price sitting above $75 per barrel. On this basis and in the current climate, Portland is confident that the rate will not be dropping to 20% any time soon. In fact, the threshold probably could have been set at $100 per barrel without much fear of reducing the 32% rate.

Understandably the North Sea operators have cried foul, but there is some scepticism around their predictions of relocation from the UK, reductions in investment and forced redundancies. Yes, it was less than 15 years ago that crude was $10 a barrel (no operator could make that pay), but with crude at circa $120, a completely different picture emerges. Even a micro-operator in the North Sea, producing (say) 1,000 barrels a day will currently be clearing £2m net profit per month, whilst a 30,000 barrel per day operator, will be generating monthly, circa £65m profit. That’s net profit by the way – after all operating costs. So times aren’t that tough for North Sea operators and the pain inflicted by the tax rise is only a relative concept.

So Portland salutes the Chancellor’s brave move in this area but is less impressed by his post budget declarations, with regard the 1ppl fuel duty reduction. Immediately after introducing the new duty measure, Mr Osborne truculently declared that he would be “watching petrol stations like a hawk” to ensure motorists were “not cheated out of the penny decrease” and that there was “no funny business”. Offenders would be named and shamed he said and the general tough talk was as embarrassing as it was nonsensical.

Firstly, the statements ignore the fact that most petrol forecourts are run by individuals under franchise arrangements and not by the oil companies themselves. In this way, the forecourt owners have complete control over pricing and so it begs the question whether Mr Osborne was planning on a marathon process of identifying each individual franchisee across the country! I hereby name and shame Mr Singh of Leighton Buzzard, Mrs Bassett of Hereford, Mr Buchanan of Dumbarton, Mr Jones of Swansea etc, etc, etc, etc. etc. You get the picture.

More worryingly though is the lack of understanding that Mr Osborne’s statements demonstrate, vis a vis the dynamics of fuel duty (again) and how it is levied. Does the Treasury believe that duty is paid by the petrol station direct to HMRC? It is not. It is paid to the oil supplier as it leaves the refinery / import terminal, who in turn pay the Treasury. So introducing an immediate 1ppl reduction in duty has absolutely zero effect on product that is already sitting in a petrol station tank, because the product has already been paid for at the higher duty rate.

In fact the budget was announced on 23rd March and assuming 3-4 day product turnaround (standard for a medium – sized retailer), the next fuel delivery would likely be on the following Monday (28th). At that point and only at that point, could the lower duty product be received and the reduction passed on to the consumer. Except for the fact that in the interim period (23rd to 28th), the wholesale price of fuel had risen by 0.50ppl and by the end of the month, it was up by a penny, thus wiping out the much heralded reduction.

There is also a depressing twist to this tale. Portland has it on very good authority, that the Petrol Retailer Association (the guys who represent the petrol forecourt sector) actually wrote to the Chancellor in advance of the budget, illustrating how duty is levied and requesting that any duty reduction would be introduced as of April 1st. This would allow retailers time to drain their tanks of higher duty product and then pass on the reduction, once the lower duty product was received. We can only guess as to why such sensible advice was ignored, but it would be very easy to conclude that the political impact of announcing a duty decrease in 7 days time just would not have the same “spin” potential as a headline grabbing “Chancellor acts on fuel prices – duty reduced by 1ppl with immediate effect”. Whatever the intent, it was certainly a golden opportunity missed.