It seemed that many consumer spokespersons and media commentators were in a state of glee with each seemingly daily fall in the price of oil in the closing weeks of 2014. At times there was an almost vicious element to some of the pieces; some celebrating the oil industry getting its comeuppance for causing years of misery, others insisting that because the price of Brent Crude had dropped from $130 to around $60 per barrel, petrol prices still hadn’t fallen far enough, fast enough. Unfortunately, the vast majority of the media coverage was written by people who have no idea how any industry actually works, and wouldn’t know what a barrel of Brent Crude was even if you tipped one over them.

magic numbers

As this was being written (mid-December), there were already some non-supermarket, dealer-owned sites retailing unleaded petrol at 112.5 ppl. Just two or three weeks earlier the typical pump price was 124.9 ppl, and by the time you read this there may be some forecourts close to the ’magic’ £1/litre for petrol a figure last seen in late 2007. Diesel prices are proving somewhat stickier, primarily because of the long-term imbalance between supply availability and demand in the UK.

For those who keep claiming that the consumer is still not seeing the full benefit of the fall in crude oil prices perhaps they might consider the following:

Fuel duty is 57.95ppl fixed.

VAT at 20% on top of that duty is11.59 ppl.

So even if crude oil was ’free’ and there were no costs related to refining, transporting, or selling it (and the retailer made zero profit out of it), the consumer would face a minimum pump price of 69.54ppl. Of course they wouldn’t see that for very long, because there’d be nobody producing or retailing it.

gradual fall

Let’s be clear, a gradual, reasonable fall in fuel prices is to be welcomed. At a time when major industrial economies such as the Eurozone, and even China, are struggling to generate any sort of growth, the fall in energy prices should act as a significant macroeconomic stimulant and possibly prevent another global recession. In the short term, and closer to home, it will add back some extra spending power to consumers who’ve seen their real disposable income reduced in recent years. As far as petrol retail is concerned, we’ve been pointing out on these pages for years that retailers gained virtually nothing from the high pump prices that they were forced to display. Quite the opposite in fact, since the main effect was to push up their bank charges and credit card handling costs per litre, while gross margins remained static or fell. At least now, if gross margins can be maintained somewhere close to recent levels, the fall in pump prices will reduce some of those overhead costs.

At 140ppl a 2% card fee was equivalent to 2.8ppl; at 112ppl the same 2% fee is equivalent to 2.24 ppl. All other things being equal, the lower pump price should add 0.56ppl to a retailer’s bottom line.

winners and losers

If the consumer and retailer gain, who loses? Apart from banks and credit card companies, the immediate losers are the government and oil producers.

The Chancellor’s Autumn Statement emphasised that overall tax revenues were considerably lower than the Treasury had forecast. That will now be exacerbated by the lower VAT take from the pumps. At 140ppl the VAT take per litre was 23.33p; at 112ppl it’s only 18.67p. Added to which the government is also losing considerable tax revenue from North Sea oil production. That wasn’t budgeted for and will only serve to make the government’s deficit position worse. What are the odds that if pump prices stay at current levels, or fall even further by the time of the General Election in May, any incoming Chancellor won’t be tempted to make up some of the loss by raising fuel duty, in the name of ’austerity’?

cutting back

Then we have the oil majors and the whole oil-producing infrastructure. Already some of the majors have started to announce cut backs on their exploration/production activities and there are rumours of further mergers and consolidation within that side of the industry. Even apart from the inevitable job losses that always accompany such moves, in the longer term they also result in reduced competition. There’s been much discussion in recent years about the very uncertain state of refining in the UK; it’s hard to see how that will improve if fuel prices bottom out at unsustainable levels for any significant period. In the longer term, will we see more UK refining capacity mothballed or simply dismantled? That would also reduce competition further. Even in the short term, there may be some more immediate knock-on effects. If you’re a dealer who needs to renew their supply agreement within the next couple of months, you may already be finding it hard to get some of the wholesalers to actually talk to you, at least as far as ’hard’ figures are concerned, and any offer that was already on the table may suddenly be obsolete.

the ultimate paradox

On a practical level, there’s some anecdotal evidence of the ultimate paradox: the recent price drops result from a glut of refined product on world markets; yet there are now examples of sites running out of product on an almost daily basis. The reason is simply that at times of falling prices nobody can afford to hold stock that might have to be sold for less than it cost just a few days earlier. So retailers are only ordering the bare minimum they think they need, while anticipating the next delivery after that to be cheaper. Understandable, maybe, but hardly a coherent way to operate in the medium term. And if consumers start deferring buying a product for the same reasons, chaos rules. Welcome to the deflationary universe.