The Office of Fair Trading report on the UK Petrol and Diesel Sector: Issues for Northern Ireland and Future Actions

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1 A Consumer Council Briefing for Northern Ireland MPs and MLAs March 2013 The Office of Fair Trading report on the UK Petrol and Diesel Sector: Issues for Northern Ireland and Future Actions This briefing paper details the key findings from the Office of Fair Trading (OFT) report into the UK Petrol and Diesel Sector which relate to Northern Ireland and outlines why the Consumer Council is calling for the action to reduce the impact of petrol and diesel costs on Northern Ireland consumers. The Consumer Council is calling for: Short Term Action: HM Treasury must cancel the fuel duty increase currently planned for September Medium Term Action: HM Treasury must undertake a review of UK fuel duty policy to assess the current policy s impact on consumers. 1. Background to the study On 5 September 2012, the OFT launched a call for information (CFI) to investigate claims that the UK petrol and diesel sectors, estimated to be worth 47 billion, are not working well. The aim was to identify whether there are competition problems that the OFT could address to improve the way the sector functions. The results of the CFI were published on 30 January The Consumer Council called on the OFT to investigate a number of issues which Northern Ireland consumers raised as concerns. This included: Why Northern Ireland consumers consistently pay more for their petrol and diesel compared to other UK regions; Why supermarket fuel retailers continue to engage in local pricing; The issue of lower fuel costs in the Republic of Ireland and impact on border regions; The impact of petrol and diesel costs on rural areas; and Pricing across the entire supply chain, not just when the fuel enters the UK.

2 2. Why Northern Ireland Consumers Pay More for Petrol and Diesel The OFT report reflected on the reasons that petrol and diesel is consistently more expensive in NI compared to the UK average. The report states a greater proportion of road fuel sold in Northern Ireland tends to be sold through filling stations that sell lower volumes and; because fewer people live close to a supermarket forecourt. Sites in Northern Ireland sell an average volume of 1.6 million litres per year compared to an average of 4.3 million litres in Great Britain and these lower volumes limit the ability to exploit economies of scale. The presence of supermarkets in Northern Ireland is not as widespread as it is in Great Britain: only 7 per cent of sites in Northern Ireland are supermarkets compared to 15 per cent in Great Britain. According to a study by the RAC Foundation on the proximity of car-owning households to supermarket fuel stations, only 82.5 per cent of householders with a car in Northern Ireland live within 10 miles of a supermarket compared to 97.3 per cent in Great Britain. The report states supermarkets are able to buy wholesale road fuel more cheaply than other retailers and the higher volumes they sell allow them to operate on lower gross margins. These factors allow supermarkets to sell road fuel at lower prices than other retailers, which in turn applies competitive pressure to rivals retailers in the area. OFT believes this volume difference alone could account for a 0.5p per litre difference in both diesel and petrol pump prices. Once other factors which influence local pump prices (such as the number of competitors and the presence of supermarkets) are taken into account, the report concludes that pump prices in Northern Ireland are in line with those in other areas of the UK. 3. Supermarket local pricing policies The OFT report states that local competition is an important determinant of pump prices as supermarkets tend to monitor the prices that rivals charge within a defined radius and aim to either be the cheapest or to at least match the lowest price charged by a competitor within that defined radius. Consumer Council fuel price monitoring found that during March 2013 this pricing differential was up to 6 pence per litre. The Consumer Council raised this as a significant issue for consumers, however the OFT made no comment on the practice of local pricing. The OFT does not view local pricing as a competition issue but halting this practice and giving the best possible price to all NI consumers would have an immediate impact for consumers. 4. Fuel Costs in Rural Areas The OFT report found that in August 2012, petrol was 1.9ppl more expensive in rural areas than in urban areas, while diesel was around 1.7ppl more expensive. The analysis explains smaller populations in rural areas leads to local forecourts pumping lower volumes and retailers therefore have to charge higher prices to cover their

3 fixed costs over a lower volume of sales. Fewer supermarket retailers in rural areas and additional costs to transport fuel to rural sites also impact on prices. Consumers in rural areas tend to travel further by private transport, and as such fuel costs will account for a larger proportion of their expenditure than consumers in urban areas. This was evidenced in the responses to the Consumer Council Fuel Survey which found that 25 per cent of respondents living in a rural area spent over 70 per week on fuel, equating to 19 per cent of the average weekly income in Northern Ireland of compared to 11 per cent of respondents living in an urban area who spent a similar proportion of their income on fuel. 5. Rocket and Feather pricing A number of consumers who responded to the Consumer Council Fuel Survey stated that pump prices increase immediately when crude oil prices rise, but that pump prices drop more slowly, if at all, when crude oil prices fall a practice known as 'rocket and feather' pricing. If this were happening it could allow retailers or wholesalers to make higher profits in the periods after the crude oil price falls. The OFT report analyses of the relationship between retail and wholesale prices at a national, local area and site level, as well as the relationship between crude oil prices and wholesale prices at a national level, and concludes that they found no compelling evidence of rocket and feather pricing. A German study in 2011 concluded that the practice was found in retail pricing; however in contrast a study by the US Federal Trade Commission in 2012 stated that pump prices react equally to increases and decreases in crude oil prices. The OFT report details a number of other studies in the US and other regions which found no evidence of the practice and the OFT note that the range of results can be attributed to the various methodologies employed in each of these studies. 6. The issue of lower fuel costs in the Republic of Ireland and impact on border regions The Consumer Council raised the issue of 'fuel tourism' close to the border with the Republic of Ireland as another factor that makes the Northern Ireland road fuel sector different to the rest of the United Kingdom. Differences in the tax regimes of Northern Ireland and the Republic of Ireland have historically led to different fuel prices. The OFT concluded that this may lead to both advantages and disadvantages for consumers who live close to the border, as whilst being able to avail of lower fuels costs this may then reduce the number of petrol and diesel retailers in the border regions of Northern Ireland. Whilst unique in the UK, the issue of price differentials across international borders is an issue faced by other areas of Europe and the OFT do not view this as a competition issue. 1 Northern Ireland Statistics Agency Annual Survey on hours and earnings April Figure is for all employees, both full and part time.

4 7. The price of diesel outstripping that of petrol Consumers have questioned why the cost of diesel in the UK is now higher than that of petrol, when this had historically been the lower priced fuel. The higher cost of diesel is a significant issue for Northern Ireland consumers as the majority of vehicles licensed in NI are diesel (Diesel 55.2 per cent / Petrol 44.8 per cent) 2. Current levels of duty on diesel are the same as that for petrol, a situation which has been consistent for much of the last 18 years. The price difference has been as a result of pre-tax prices, which are thought to be largely due to long-term increases in demand and limited refining capacity. Between 1998 and 2011 there was a 36 per cent drop in petrol consumption over this period while diesel consumption rose by 39 per cent. UK refineries are configured to meet historical patterns of demand which maximised petrol production. In recent years the UK's refining capacity has reduced and upgrading refineries to increase diesel production would require substantial investment, therefore the UK imports diesel and exports petrol. The UK s changing pattern of demand is mirrored across the rest of Europe, where demand for petrol is in decline whilst diesel demand increases. 8. The impact of fuel duty and VAT on petrol and diesel. Fuel duty and VAT make up the most significant proportion of the final pump price. The UK has consistently charged relatively high duties on road fuels compared to other EU countries for the past 20 years. The increase in the rate of VAT from 17.5 per cent to 20 per cent in January 2011 also increased pump prices. UK diesel pump prices are further out of step with EU prices as the UK is the only country where diesel and petrol diesel duty rates are the same. The diesel discount in most other member states is between 20 per cent and 30 per cent 3. The OFT stated that they would not be considering the impact of tax and duty, yet this has a significant impact on the final price. Between 2003 and 2012, pump prices rose by 60p per litre for petrol and 64p per litre for diesel (an increase of 40 and 44 per cent respectively in real terms). These increases are largely down to increases in the cost of crude oil, which has quadrupled in the last decade, and in UK taxation of road fuels. 9. Conclusion The OFT concludes that Northern Ireland prices are on average higher than other areas of the UK due to lower volumes and less competition from supermarkets. 2 Northern Ireland Transport Statistics , Department for Regional Development. 3 EU Oil Bulletin

5 However, as prices remain higher in NI and we have the highest percentage of rural dwellers compared to other UK regions there is still a need to address this issue for consumers. In addition to this is the fact the OFT call for information relates specifically to the UK petrol and diesel fuels sector. Forecourt pump prices are influenced by a number of factors including the price of crude oil, the cost to produce (refine) petrol and diesel from crude oil, Government duty and taxes, transportation costs, exchange rates, demand and competition. To ensure there is complete clarity there still needs to be an investigation across the whole supply chain and the various elements that impact on fuel prices. The UK has some of the cheapest prices in Europe before tax and duty, and increases in the pump prices of petrol and diesel over the past 10 years have been caused largely by higher crude oil prices and increases in tax and duty. There is a need to focus on the impact of the current taxation policy, with current levels of fuel duty and VAT representing per cent of the final pump price. Concerns about the level of fuel prices has led the Government to postpone or cancel proposed duty increases on three occasions since the level of duty was cut in March 2011 by 1 pence per litre. This is a clear indication that the current fuel duty policy needs to be reviewed. The Consumer Council welcomes the success of local MPs and MLAs in helping to secure a decision from HM Treasury to scrap the 3 pence per litre increase in fuel duty scheduled to take effect in January 2013 and asks that you call on HM Treasury to implement a UK wide review of the consumer impact of current road fuel taxation policies. Continuing to have a rolling deferral provides only a short term protection on the cost of fuel to consumers. To address the impact of the cost of petrol and diesel on consumers the Consumer Council is calling for: Short Term Action: HM Treasury must cancel the fuel duty increase currently planned for September Medium Term Action: HM Treasury must undertake a review of UK fuel duty policy to assess the impact on consumers of the current policy. For further information contact Scott Kennerley, Head of Policy (Transport) at the Consumer Council on or skennerley@consumercouncil.org.uk