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Posts Tagged ‘fuel prices’

The latest ‘Family Spending’ report from the Office for National Statistics published earlier this week says that the average UK household spent £489 per week in 2012. Approximately 13% (£64.10) of this went on transport.

Interestingly, this was the first year since 2001/02 (when the data were first collected in a comparable form) when transport wasn’t the biggest single area of household expenditure.

Housing and fuel costs rose from £66.40 in 2011 to £68 in 2012 to ‘top the poll’, whilst transport spending fell from £67.20 in 2011.

So why are people spending less on transport? Probably not because it is getting any cheaper to run a car but rather the opposite; transport remains expensive but the cost of domestic heating is also rising significantly and hard choices have to be made.

The ONS says:

“Prices of domestic energy, such as electricity and gas, have increased in the UK over recent years. Households may have had limited opportunity to reduce their usage of these fuels, leading to higher expenditure over a period of price rises.”

Looking at transport spending in particular, the ONS suggests:

“A significant factor is likely to be spending on petrol and diesel. The prices for both types of motor fuel have increased over recent years, and there is evidence that households have taken steps to reduce the amounts used. The 2011 Census showed that fewer people are driving to work, compared with 2001, and more were using public transport, while the National Travel Survey reported a fall in the number of journeys taken by private transport between the mid 1990s and 2012. Furthermore, fuel efficiency in car engines has improved and there is evidence more people are using diesel engine vehicles in an effort to reduce spending.”

This is not quite right. Actually, as our report out earlier this month showed, a record 16.7 million people are now driving to work or getting a lift. What is true is that the proportions have fallen slightly over the past decade but this has been offset by a rise in population. These are the commuting by car (or van) figures:

1981 10.6 million

1991 13.1 million

2001 14.5 million

2011 15.8 million

2011 16.7 million

Spending on transport did not just drop in 2012 but has been in more or less continuous decline since 2001/02, when the average UK household spent £87.10 (in 2012) prices. This is equivalent to a drop in spending of over a quarter over the past decade. Commenting on this, the ONS reiterates that:

“The price of petrol increased substantially over this period, and it’s likely that motorists have responded to this by reducing journeys.”

There we go. In the short term demand for fuel is relatively price inelastic. But faced with long term price rises, over time people try to adapt behaviour at the margins to cut back on usage. (There is also another factor at play. While the day to day running costs of owing a car have far outstripped inflation, the cost of buying a car – new and second hand – has fallen over recent years. Of course day to day running costs are for many a largely unavoidable expense while forking out large sums for a car – and even with price reductions car purchases are still major pieces of expenditure – is something that most of us can defer.)

But adapting travel habits only goes so far and in spite of these likely cutbacks the latest data indicate that the average UK household is still spending almost two fifths (38%) of its total transport expenditure on fuel. No wonder the chancellor used the recent Autumn Statement to confirm the freeze in fuel duty he had proposed at this year’s Conservative conference.

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This morning the media has – rightly – hailed the good news that the rise in fuel duty planned for 1 September has been abandoned.

But what exactly was the size of the rise due to have been?

Much of the media has gone for a 3p rise, and indeed were doing so well ahead of yesterday’s statement. Yet in the Budget 2013 document released yesterday by the Treasury, the Chancellor said the rise foregone was in fact 1.89p (P53) to which VAT would have been added:

“Budget 2013 announces that the 1.89 pence per litre fuel duty increase that was planned for 1 September 2013 will be cancelled. This means that fuel duty will have been frozen for nearly three and half years, the longest duty freeze for over 20 years.”

In the grand scheme of things there isn’t much – in absolute rather than percentage terms – between the two, but where might the confusion have come about?

The previous increase was due on 1January 2013 and this was abandoned completely. The amount of this increase was set to be 3.02p – 3p to you and me.

The next cost of living increase was due for 1 April this year but had already been delayed to 1 September. It was this planned increase that the Chancellor shelved completely yesterday. Prior to yesterday no figure had been set for the level of the hike. All that had been said was that the amount would be confirmed in Budget 2013. And it was, but only so it could then be announced that it was never going to be implemented.

According to the Fair Fuel Stabiliser that the Chancellor introduced in Budget 2012 future annual rises in the level of fuel duty would be in line with inflation so long as the price of a barrel of crude oil was above £45 a barrel – it is currently much higher than that. If the price of oil should fall below £45 over a sustained period then the rise in the rate of fuel duty would be inflation plus 1p per litre.

So where does the 1.89p quoted yesterday derive from? Earlier this month we heard that the cost of living as measured by RPI (and this was the benchmark figure outlined in the original FFS formula) was about 3.3%. If you take 3.3% of the current rate of duty of 57.95p per litre you end up with 1.85p; markedly close to the figure of 1.89p mentioned in the Budget yesterday.

Of course this is all academic now because the rise did not go ahead, but while yesterday was undeniably a good day for drivers, it was not quite as good as many of us might have thought.

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So there we have it. The UK fuel market is a healthy beast, at least according to the OFT report just published following last year’s call for evidence.

To be fair researchers were unlikely ever to have reached any other conclusion.

The big problem is not what is happening in the fuel market, but what is perceived to be going on. It is a sign of the opaque nature of the whole market that the OFT had to delve into it in the first place. Its murky nature has long meant that drivers have been distrustful of it. But today the OFT has identified the real causes of motorists’ misery at the pumps: the chancellor and oil prices, not the machinations of the wholesale market for refined products.

While all the attention has been on the profits being made after petrol and diesel leave the refinery gates, this report reminds us that the biggest price drivers are taxation and the cost of oil. As it stands George Osborne is currently taking 60% of the pump price in fuel duty and VAT, and a barrel of Brent crude retails at the stubbornly high level of $114.

The Foundation would urge garages to provide a breakdown on their till receipts which reveals to drivers exactly how much the Treasury is taking.

The OFT report found “very little evidence” to support the idea of so-called rocket and feather pricing where pump prices rise quickly in line with wholesale price increases but significantly lag any decline in wholesale prices.

The watchdog does however make reference to the high prices charged at motorway service stations. While accepting that these prices might be associated with the higher costs involved in these sorts of operations it wants drivers to be forewarned of the prices before they actually pull off the motorway, possibly by new signs erected by the DfT.

The OFT has also found no evidence that the increasing dominance of supermarket forecourts has been detrimental to drivers. While there have been closures of independent retailers this has not had a negative impact on motorists, in fact the UK has – pre-tax – some of the cheapest road fuel prices in Europe. Research submitted to the OFT by the RAC Foundation showed that 97 per cent of car-owning households were within ten miles of a supermarket forecourt.

None of this will necessarily come as much relief to hard-pressed drivers who are still paying near-record prices for petrol and diesel, but at least it shines a light on where the ‘blame’ for high prices really lies: not, as many of us might have suspected, at the door of the retailers and wholesalers.

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Diesel price – 140.77p (record high 142.17p April 2012)

Petrol price – 132.95 (record high 148.04p April 2012)

Fuel duty and VAT account for about 60% of the pump price of both petrol and diesel.

There are 35 million drivers and 28 million cars in Great Britain. Of the cars, 19 million are petrol and 9 million diesel.

There were 37,000 petrol stations in 1970 but less than 9,000 today.

RAC Foundation work shows that 87% of UK car-owning households are within 5 miles of a supermarket petrol station. 97% of UK car-owning households are within 10 miles of a supermarket petrol station.

According to work done for the RAC Foundation by the consultancy Deloitte, the UK is now a net importer of crude oil and refined diesel. The reasons are two-fold:

1)     The UK’s North Sea oil reserves have shrunk steadily.

2)     Overall, UK refineries are configured to produce more petrol than diesel, however the demand for diesel has grown over time and the cost of ‘retro-fitting’ our refineries would be prohibitively expensive. Therefore we need to import some diesel to meet our needs.

The Deloitte work shows that ten years ago there were nine UK refineries. Today there are seven. Of these seven, all but one have been up for sale in the past three years.

In 2011 the average household expenditure was £484 per week. £65.70 of this was on transport, 14% of the total.

OFT terms of reference:

  • whether reductions in the price of crude oil are being reflected in falling pump prices
  • whether supermarkets’ and major oil companies’ practices may be making it more difficult for independent retailers to compete with them
  • whether there is a lack of competition between fuel retailers in some remote communities in the UK, and
  • whether concerns about price co-ordination and the structure of road fuels markets identified by other national competition authorities are relevant in the UK.

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This is what the Autumn Statement document statement says about changes in fuel duty:

“The Government will provide further support to businesses and motorists by cancelling the
3.02 pence per litre fuel duty increase that was planned for 1 January 2013. The
2013-14 increase will be deferred to 1 September 2013. This will mean that fuel duty
will have been frozen for nearly two and a half years. For the remainder of the Parliament,
subsequent increases will take effect on 1 September each year, instead of 1 April.”

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