The recent fuel-crisis-that-never-was proved interesting for a number of reasons. Government ministers advising consumers to buy jerry cans and hoard petrol at home was merely the most amusing but at least it served to highlight just how important the petroleum retail industry is to the normal functioning of everyday life. Important is too mild a word ’essential’ or ’vital’ are more appropriate adjectives. In a society and economy like ours, the continuing availability of motor fuel is hardly any less important than the continued supply of water, gas, electricity and telecommunications links. Sever any of these for more than a few hours and watch life as we know it start to disintegrate.
The media and political furore in March and April also revealed just how little most politicians know about this industry, or care about it, other than when choosing to use it for raising more tax revenue. While various industry experts were patiently explaining to the media and public that the UK’s petrol-retailing infrastructure in 2012 was substantially weaker than during the last fuel crisis in 2000, the politicos clearly failed to comprehend what had changed in less than 12 years; failed to understand how or why there were only just over 8,000 petrol stations today compared to the 14,000 or so back in 2000; or the 19,000 that were open 10 years before that; failed to understand that many of the remaining ones couldn’t afford to keep full tanks because of the high price of fuel (and let’s not forget that out of today’s 149.9ppl of diesel, the fuel duty and VAT elements account for almost 83p or over 55% of the retail price); the delivery terms of the suppliers; and the reluctance of banks to lend the cash required to pay for the stock.
They also failed to understand that the UK refining and distribution industry today is no longer owned or controlled by the same oil companies whose brands are displayed on the forecourt.
Let’s not mince words: politicians were seen to be supremely ignorant of an industry upon which so much of our day-to-day life depends.
Look at the other essential services electricity, gas, water, telecomms notice anything about them? Each operates in a nominally ’free’ market, but there is an explicit acknowledgement that their markets are imperfect and so a legal framework has been imposed to try and regulate each of them and the activities of the major players within them.
Hence, we have Ofcom for the telecomms sector, Ofwat for the water industry, Ofgem for the electricity and gas suppliers, and so on. It’s worth remembering that while these statutory regulators are publicly perceived as having been set up as some form of ’consumer champions’, that really isn’t why they exist. They are there to ensure that the strategically important industries that they oversee continue to operate without interruption and in an economically sustainable form. Is it time then for an ’OfPet’ to regulate the petrol distribution and retail industries?
A regulator tasked among other things with protecting the petrol retailing network to ensure that the number of forecourts doesn’t fall any further, maybe even encourage new entrants into the so-called ’fuel desert’ areas that have sprung up across parts of the UK. How? How about by considering a minimum retail price across the UK? In this day and age it should hardly be beyond the wit of humans to look at the Platt’s pricing models used by the independent dealer sector, and use them as a template for setting a minimum retail price to be enforced across the market.
For the sake of extreme simplification: Platt’s + fuel duty + distribution cost + retail margin + VAT, which gives individual retailers a guaranteed margin on each litre. Anyone would be free to sell above the minimum, but not below it. An end to supermarket predatory pricing practices overnight!
Of course, this example is a simplification, in reality such a regulatory framework would need to take account of Platt’s timing issues and constantly varying pound/dollar exchange rates.
The minimum wholesale/retail margin would need to be reviewed periodically, not least to keep up with wage and other cost inflation. This is 2012 so you don’t need hundreds of staff and a mainframe computer to perform the calculations once the model has been established. Other tasks for such a regulator to look at might include: supplier credit periods and guarantees as we’ve pointed out before, many independents are squeezed between their fuel supplier’s two- or three-day payment terms and the extended credit imposed by the fuel card industry; or maybe another look at the merchant terms of the credit card companies as they affect fuel retailers in particular.
It should go without saying that the idea of an ’OfPet’ would be attacked from all sides. Quite apart from those who hold genuine ideological beliefs that any sort of interference in the ’free market’ is wrong, the supermarket chains would fight it tooth and nail as a restriction on their ’right’ to lose money while putting independents out of business.
The oil companies would fight it because it would restrict their ’right’ to undercut their own dealer network through lower pricing on company-owned forecourts. The consumer lobby would attack it for raising fuel prices (yes it would, at least initially, although it would affect perceived headline prices more than real pricing, and might even make fuel prices more stable and transparent in the long run). And the media would attack it for increasing ’oil company’ profits.
To return to where we started: recent events reminded everyone just how much the country depends on the petrol retail industry.
They also showed an industry which is extremely fragile and which barely functions in the way that most of those outside it still imagine.
The idea of a regulator may not be popular, but once you get past the initial reactions isn’t it at least worth a second look?