FAQs - Petrol retailing

Q:	The major oil companies virtually control the market which is why pump prices seem to move in unison
A:	The reason pump prices may sometimes appear to move in unison is very much a reflection of a highly competitive market with about 12 significant competitiors in the market, with the supermarkets alone accounting for a market share of around 40%. With such a competitive market, UK pump prices before tax are amongst the lowest in Europe. Being virtually a homogenous product, petrol and diesel are unique amongst other products in that the price is prominently displayed at the roadside before you even enter the premises to make your purchase. As a result, few retailers can afford to have prices that are not competitive for long.

Q:	What determines pump prices?
A:	In the UK, tax, at around 62% of the total, is the single largest component of the pump price. Aside from taxation, a number of factors, including crude oil price, the cost of refined product, exchange rates and competition determine the pump price. Crude oil is a commodity traded on international markets and from it a whole variety of products are derived including fuels such as petrol, diesel, jet fuel and heating oil. These products, too, are widely traded with prices fluctuating according to demand and supply, seasonal factors and the cost of crude oil from which they are refined. All these factors, plus exchange rates and local competition have a bearing on the price at the pump. Despite the high tax component, prices fluctuate to reflect changes in the cost of refined product and exchange rates. For a more detailed explanation of petrol and diesel prices, see UKPIA's briefing on Understanding Pump Prices

Q:	It is hard to believe that pump prices are so similar unless oil companies agree on them.
A:	Fuel retailing is a very transparent and competitive market, a fact which has been confirmed by the Government's Monopolies & Mergers Commission and Office of Fair Trading which, over the years, have examined every aspect of the refining and marketing of fuels. They concluded that there was no evidence of anti-competitive practice or profiteering. The Director General of Fair Trading commented in the 1998 OFT report that "For the consumer, price competition between supermarkets and oil majors has contributed to petrol prices falling in real terms (minus tax and duty) by about 1/3rd since 1990 […]. I believe that this is what vigorous competition is all about and I am pleased to see that the petrol industry has responded"

Q:	Oil companies always seem to be slow to reduce pump prices when oil prices fall but quick to put them up when prices rise.
A:	UKPIA can't comment on the actions of individual member companies, which make their own pricing decisions. However, the facts don't seem to bear this out. For example, if you look at the period between January 2007 and end of February 2007, the wholesale price of petrol in NW Europe increased from US $499 per tonne to $557, but the average price of unleaded petrol fell from 87.80p per litre to 86.72p per litre (source: WoodMackenzie OPAL Price Assessments) Generally, pump prices do follow the trend of crude oil and refined product prices but the change in post tax pump price is to some extent diluted because taxation still accounts for about 62% of the price.

Q:	Motorists seem to get a pretty raw deal on pump prices in the UK.
A:	It is quite the reverse if you look at the price before tax. Prices in the UK have been consistently amongst the lowest in Europe and have fallen by 1/3rd in real terms over the last 10 years. During the same period the proportion of tax has gone up from 58% to over 75% at one point and averaged at about 62% in 2008, mainly as a result of increased crude prices. View a comparison of European pump prices of UL95 petrol and Diesel.

Q:	Who gets what out of every litre of petrol?
A:	The Exchequer takes the lion's share. Ignoring duty and VAT, over 2008 the average cost of a litre of major brand unleaded petrol at the pump was 107p, of which 63p was duty and VAT. Typically, after deducting the cost of buying the petrol from a refiner, the amount remaining is about 5p per litre. This has to cover all the costs of storing and transporting the fuel, the running of service stations, and marketing, as well as generating an income or profit for the retailer operating or owning the filling station.

Q:	It appears that the policies of the major oil companies have driven smaller retailers out of business?
A:	There has been dramatic decline in the number of filling stations from about 18,000 in 1990 to 9,264 at the end of 2008. Petrol retailing is a high volume low margin business and increased competition, particularly from supermarkets, has squeezed profit margins. Coupled with the higher standards that customers expect on the forecourt and stricter environmental legislation, a lot of sites just could not justify the investment needed to keep up to modern standards. Inevitably many of these were smaller independent sites but the major companies have also closed many of their own forecourts. Year No. of sites Company Owned % of total Av. Site throughput (mio. Litres) 2008 9,264 2,190 24% 4.01 2007 9,430 2,191 23% 3.99 2006 9,526 2,225 23% 3.93 2005 9,726 2,391 25% 3.82 2004 10,351 2,722 26% 3.63 2003 10,535 3,041 29% 3.45 2002 11,425 3,805 33% 3.28 2001 12,201 3,966 33% 2.99 2000 13,043 4,295 33% 2.87 1999 13,716 4,470 33% 2.73 1998 13,758 4,713 34% 2.71 1997 14,824 4,775 32% 2.51   Source: Catalist (2005-2008); Energy Institute Retail Marketing Survey (1997-2004)

Q:	Nearly all the major UK companies have both refining and marketing interests and seem to draw petrol from each other's facilities. Surely this gives market control rather than contributing to low prices and competition?
A:	The short answer is no. The UK's 9 refineries rank amongst the most efficient in the world and coupled with excellent distribution and storage infrastructure, including a number of pipeline networks, the UK market in refined products is well developed. Refining companies have developed commercial arrangements for regional product swaps, which cuts out unnecessary transport of products around the country. This promotes local competition and prevents the owner of a refinery developing a dominant local position. Companies that don't have a refinery, along with other independent wholesalers and retailers, also have access to this UK market in refined products. In addition, there is a well developed market on the near Continent, particularly in Antwerp and Rotterdam which means products can be imported into the UK with comparative ease. So, the physical barriers to entry into the petrol retailing market are low and although owning a refinery gives access to and control over the production of products from crude oil, this does not translate to market control.