Oil Market Report September, 2012

When the OFT announced in September an inquiry into the price of fuel, campaigning groups against the high price of petrol and diesel finally felt that their concerns were being acted on. At the same time, Government Ministers breathed a quiet sigh of relief as the subject of fuel prices could be pushed another few months down the track. Meanwhile within the OFT itself, those employees with knowledge of the industry, surely privately recognized just how little influence they can have on the price of fuel.

That is not to say that the OFT has little influence, only that it can merely touch a tiny part of the cost of fuel. To understand this problem, we need to remind ourselves how (for example) Diesel is priced in the UK:

55p is the raw product cost and is based on the Rotterdam wholesale price (price taken on 31st Aug)

58p is Government Duty (tax) applied to every litre of diesel sold in the UK

1p is the cost of shipping from Rotterdam to the UK

0.5p is the cost of storing a highly hazardous product safely and without damage to the environment

0.75p is the cost of transporting that highly hazardous product by road tanker, driven by employees who earn £30,000+ per annum

3p is the standard margin added by a petrol station forecourt

24p is the VAT, also taken by the Government on every litre of diesel sold

142.25p per litre is the total cost, paid by the consumer

For those readers who are unaware of the way fuel is priced, just have another look at those figures. Consider for a moment that Government tax is 158% of the actual cost of the product. Also consider the fact that for every 5p increase in the basic cost of fuel, VAT revenue goes up by 1p. On 25 billion of litres of diesel sold per annum in the UK, that’s an extra £100m of increased revenue for the Government since May (when the price was 5ppl lower than it is now). So yes, whether they acknowledge it or not, the Exchequer benefits from rising oil prices.

A previous monthly report detailed how the Rotterdam price is formulated but there will always be a number of people who believe that the price is cooked. To those who fall into this category, we would only ask the following question; “if an oil company can sell their diesel for 55ppl in Rotterdam and this fact is demonstrably illustrated on a daily basis, why would they sell that product for less than 55ppl in the UK?” Diesel, is diesel, is diesel… (ad infinitum). It does not have different product qualities depending on the country it is sold in and no consumer chooses to pay a premium for British Diesel because it is of higher quality. In fact it smells the same, looks the same and does exactly the same thing wherever it is sold. Which means it is sold at a worldwide price – not a local price. And if we follow the supply-chain further, if buyers in the Far-East are willing to pay 57ppl for their fuel, why would anyone sell it for 55ppl in Rotterdam? Sellers will simply move the product to the region which pays the highest price – something that is easily facilitated by low shipping costs…

Consider if you will that a (ship) tanker transporting 20m litres of fuel from North-West Europe to the Thames (with all the risks and costs that such a voyage entails), costs only 1p per litre or 0.7% of the total cost of diesel in the UK. As part of their study, the OFT will have to show that, that cost is excessive! In fact, they are going to have to demonstrate that a total of 2.25ppl for the entire fuel supply chain (shipping, storage and transport) represents bad value for money. Ditto the 3ppl added by the fuel retailer. On average, the latter generates a gross profit of less than £100,000 pa for the forecourt owner – hardly rapacious (see April report). So whatever the OFT does find, they surely cannot conclude that 5pppl (3.5%) is OTT, when the total price is 142ppl.

The OFT should cover important issues around the pricing of fuel by Supermarkets vs Independent Retailers, plus whether fuel prices drop at sufficient speed versus falls in the crude oil price. But the clamour for this inquiry is driven by high prices (would we really have a study if petrol cost 80ppl?) and nothing the OFT says will have an impact on this. They will conclude that the UK premium (covering shipping, storage, transport and margin) added to the Rotterdam price is not disproportionate and for commercial buyers at least, there exists the opportunity to lock this premium to a fixed rate – or as a minimum, check the Rotterdam price on a daily basis to ensure consistency and fairness. So the OFT inquiry will achieve nothing other than raised expectations. Only the Government can influence prices to any significant extent and it is surely now time that they came clean on fuel prices; either drop duty levels immediately and ease the pressure on consumers or explain in clear terms why high fuel taxes are essential for a Government that is so short of money.