As this is being written, crude oil prices hover around the $40 per barrel mark, compared to around $25 at this time last year. Pump prices on some forecourts have already gone past 85p a litre and we’re starting to hear the sort of grumbling that preceded the UK’s fuel crisis of 2000, especially since the Duty increases announced in the 2004 Budget have yet to come into effect on September 1. However unreasonable the tax burden attached to road fuel in the UK, there are a number of international factors over which no single government has much influence that are responsible for the current trend in prices. Energy industry commentators have pointed to such causes as instability in major producing countries such as Saudi Arabia (including terrorist attacks on refineries and pipelines); reduction in worldwide refining capacity following industry consolidation; build-up of strategic oil stocks by the USA; and unprecedented demand from China (estimated as 15 per cent up from last year, and with little sign of slowing).
The consensus of opinion seems to be that we should expect prices to remain high for the foreseeable future, whatever pressure that causes – and that after getting a severe fright from protestors last time around, the government has been quietly whipping the UK oil majors into planning for a different scenario if there’s any repeat of the blockades this autumn.
Of course not everyone is complaining about the price rises. The Green lobby has long maintained that unless fuel is priced higher in real terms we’re never going to meet essential CO2 emissions targets. They point out that today’s oil prices are actually about half those of 1979 if we adjust for inflation. Then of course we have the oil producing companies themselves – look out for some mega-profit announcements later in 2004/05 from the majors. Not only does a high oil price produce high profits, but it also strengthens balance sheets – those controversial oil ‘reserves’ which might have looked too expensive to get out of the ground suddenly become a lot more attractive if you can sell the product at twice the price than a year ago. And of course there’s another group of interested parties who’ll not complain too loudly about the pump price increases: the credit card companies.
Look at your own retailer credit card agreement. Let’s say that you’re on a ‘typical’ agreement where the card issuer charges you 1.5 per cent commission per transaction. For every million litres at 75p that you sell on plastic you’ll be paying them £11,250. If the pump price rises to 85p a litre that cost will increase to £12,750, and if we’re faced with pump prices of 90p a litre the cost will be £13,500. Not, of course, that you’ll be making any extra margin from the price increases. Let’s put it another way: you’re a dealer with a fixed margin from your oil company of, say, 2p a litre, and paying your own card processing or commission fees at 1.5 per cent. For every litre that you retail on credit cards at 75p, the card processor will charge you 1.13 pence. Sell the same litre at 85p pump price and you’ll be charged 1.28 pence. At a pump price of 90p they’ll charge you 1.35 pence. You can do the calculations and come out with some pretty horrible figures – there are some card issuers out there still charging 2.25 per cent or more for the privilege of accepting their cards. If you’re stuck on your 2p margin and someone uses one of those cards to buy fuel at 88.9p a litre – yes, that’s your entire margin gone down the river.
There’s nothing you can do about pump prices. In the short term there’s not much you can do about your margin (not if your present supply deal has a few years to run) or about the individual card issuers’ and processors’ charges (although check to see whether anyone’s offering better terms). Many supply ‘deals’ have also stipulated which cards you’re expected to accept, so there may be little you can do about those either, although gentle persuasion of customers away from expensive cards might help. But if we’re faced with high fuel prices for the future, look carefully at the credit card costs and support offered by competing fuel suppliers, and the banks. In the long run it might make a huge difference to your overall profitability. In the short run there’s not much point wasting effort and blaming the government; retailers should enlist the help of the oil majors, and get to talking as an industry with the card issuers about their rates.