When’s the last time you saw two government ministers having a good old go at oil companies and petrol retailers? Not recently I’ll bet. But then things have changed rather a lot in the last 12 months. Oh, and let’s not forget there’s an election looming too. This week George Osborne and Danny Alexander warned petrol retailers to quickly pass on falls in the price of crude to consumers is because the oil price has plunged 25% since June. And that fall is because the power balance in the Kingdom of Oil has changed significantly.
America is now the world’s largest producer of crude oil and the Saudis have lost the top spot. Fracking across the US has increased global output significantly and Obama has eased restrictions on America exporting oil. Demand in China and Europe has fallen so there’s an oversupply situation as well. In the past OPEC have controlled prices by restricting supply, but now they’re reluctant because they’re afraid of losing market share. America holds all the cards as the world’s major producer and the Arabs are playing the waiting game. They’re leaving supply unchanged because they hope the price will fall to around $70 a barrel (its $83 at the moment) at which point fracking could become uneconomical and the market may then swing back in their favour.
A lot, an awful lot, of course depends on China and if their recession is deeper than predicted, low oil demand could still keep prices low for the next couple of years. Some analysts and banks are predicting that we could be looking at low crude prices for a good while yet. What’s also interesting is that oil speculators have lost their ability to hike up the market as well. They tried back in June with fears over ISIS incursions into Libya and talked the price up to $115, but it quickly fell back and has been falling ever since. For the first time (probably ever) a western democracy is in charge of oil prices and the normal constraints of supply and demand are taking hold. Oil is finding a natural price level.
The tumbling price has taken everybody by surprise, not least in the UK where the historic 25% drop has only translated into a 5% cut at the pumps. Oil majors, refiners and some retailers have clearly been hanging onto bigger wholesale margins longer and not passing them onto consumers quickly enough. For politicians approaching an election this is a heaven sent opportunity to ride the cost of living bandwagon and to sternly tell the big bad oil boys off. Osborne and Alexander do have a point though. Crude now costs a quarter less than it did in June so there must be savings to be passed down the supply chain. Interestingly, as soon as FairFuelUK and the ministers stated to talk about this in the media, that same afternoon supermarkets made an announcement that they were cutting prices - a reflexive reaction to negative publicity. A clear demonstration that cuts at the pumps can happen very quickly indeed.
I do have to say though that it was slightly hypocritical of the Government to take the moral high ground against the oil industry when 63% of what we pay at the pumps goes to The Treasury in duty and VAT. When it comes to petrol and diesel, Westminster is by far the biggest earner and to blame all our forecourt woes on the fuel retailers really isn’t fair. Around 80 pence of every litre still goes to Mr Osborne and that’s the highest fuel duty level in Europe after Norway. And the Norwegians certainly don’t rely a road economy like we do.
So as well as asking the government to cut duty before the next election, we at FairFuelUK are asking,directly through a letter to George Osborne (click on the letter to see full text), for an truly independent enquiry into oil price manipulation and forecourt pricing. We did ask the OFT to look into this in 2013 and I presented a weighty petition at the OFT doors to prove there was significant public interest but the OFT reckoned there was no case to answer. Well, the last week has proved there’s still confusion and anger at the way fuel prices go up so quickly and fall so slowly and the industry either needs to explain this complicated market to us clearly or do the right thing and pass the falls in the price of crude oil to consumers much quicker than they do. Either way we need much more transparency.
But the most important change of the last 12 months (and one we’re very proud of at FairFuelUK) is that politicians now understand that low fuel prices are good for the economy and stimulate growth. Hearing The Chancellor and Chief Secretary to The Treasury talking about the social and economic benefits of low fuel prices means that the bad old days of high fuel prices being a necessary part of the UK’s taxation strategy have gone forever and road fuel can’t be used as a taxation panacea any more. And we at FairFuelUK did that. We proved to The Treasury that suspending all those fuel escalators over the last three years has actually increased GDP by 0.5%. That’s a major victory.
So I predict that as we approach an election we’ll be hearing more ministers talking about lower transport costs being a good thing for the UK economy. We at FairFuelUK are going to make sure that everybody (including the Government) is aware that it’s not just the oil industry that must act responsibly, but The Treasury too. With all this political moral outrage going on its time the Government did its bit and cut prices too. A minimum 3p cut on every litre would simply be the right and responsible thing to do. After all, as The Treasury and Bank of England tells us, cheaper fuel stimulates growth and lowers inflation.
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