Forecourt Trader - 30 years at the heart of the fuel retailing community

Fuel price shock?

05 December, 2007
The pound+ litre is here to stay (again)
Page 14 
Most people have been dreading it for a long time, but we've now broken through the £1-per-litre barrier at the pumps and this time it's probably for keeps. Sure, as this is being written, some sites are still selling unleaded at 99.9ppl, but it's unlikely that they'll be able to keep that up for much longer.
Now in some quarters this is all being seen in grand, apocalyptic terms: 'Peak oil', 'The Fall of the Almighty Dollar' etc. And while the media like to indulge in portentous 'historical' explanations of this sort, one real historical fact has been overlooked. November 2007 wasn't the first time in the age of the car when petrol prices hit the equivalent of £1pl (or £4.55 a gallon). There have been similar peaks before, but thanks to the effects of retail price inflation and some degree of collective amnesia, they've been forgotten.To take one admittedly extreme date, indexed to 2007's value of the pound sterling, in 1916 a gallon of petrol in the UK cost around £8.40, which works out as around £1.85pl. And that was before governments had discovered how much tax they could start putting on the stuff. If that's too far back, take 1957. Just after the Suez crisis, the UK gallon retailed for £5.26 in today's money - that's £1.16pl. If that's still too far back, there is late 1973, around the time of the first modern 'oil crisis' following the Arab-Israeli war. Then the UK gallon was selling at £4.65 in today's money, which is equivalent to £1.02pl, with a similar figure in 1979 -around the time of the US/Iranian hostage crisis.Enough history. The fact that today's fuel prices aren't uniquely high in real terms doesn't mean they won't bring their own problems. Firstly there's the general economic impact of fuel pricing as transport costs are a necessity for most people. Hence when transport costs go up, and before disposable income has had a chance to follow, something has to give. Usually that'll be retail sales. Some of the big high street names had already announced their 'pre-Christmas sales' season in mid-November. A further impact of fuel pricing is due to the fact that virtually all of the goods we buy and sell are transported by road and so the cost will go up. Look at that again. Customers with less money to spend, suppliers with rising costs - there's a squeeze somewhere in the middle there. Looks like it will be the wholesalers and retailers who'll be taking the pressure.Look more closely at petroleum retailing and we'll see more effects. How much are you being charged for 'merchant fees' by your credit/charge card handler? As we've pointed out many times previously, the card companies skim right off the top. For example, if you sell a litre of diesel for 105.9ppl and the card processor is charging you 1.95%, that's 2.07p off your margin straight away. Sell a litre of one of the 'super' diesels for 107.9ppl to a customer who uses one of the 'posher' charge cards who charge you, the retailer 2.25% for the privilege of accepting them, and that'll be 2.43p straight off the top of your fuel margin. Now just how much margin did you have to begin with? Let's hope it was well over 2p. Of course some of those customers may be paying cash. A typical bank charge for cash handling these days is 45p per £100. Sell 40 litres at 103.9ppl and that'll be 19p as a cash handling charge, or almost 0.5ppl off your margin. If things like card and cash handling charges are fairly immediate, there are other longer-term effects on some sites. Many dealer-owned sites have historically operated as limited companies. Under current rules a 'small' limited company whose accounts show a turnover below £5.6m per annum has been able to avoid the cost of a 'statutory' financial audit. With rising fuel prices pushing turnover higher, more of these businesses will fall back into requiring a statutory audit - and if you've not been subject to one of those for a few years, stand by to be shocked. Recent changes to audit rules have effectively meant that the cost has almost doubled in the past few years.This may seem a slightly grim note on which to end the year, but at least if history teaches us anything it's that there's nothing new under the sun. Look on the bright side - fuel retailers have survived and even prospered after all of those previous fraught periods when fuel prices were high. But you can bet that each time they thought they were in uncharted waters. Here's wishing you a prosperous 2008.



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