By Daniel Hunter
Rises in pump prices for petrol and diesel over the last 10 years have been caused largely by higher crude oil prices and increases in tax and duty and not a lack of competition, an Office of Fair Trading (OFT) report has found.
The evidence gathered by the OFT suggests that at national level competition is working well in the UK road fuel sector, although it has identified an absence of pricing information on motorways as a concern and does not rule out taking action in some local markets if there is persuasive evidence of anti-competitive behaviour.
The OFT launched a call for information on the UK road fuel sector in September last year to determine whether there are competition problems that need to be addressed. In addition to assessing the information submitted to it, the OFT has undertaken detailed analysis of pricing data to investigate claims that the £47bn market is not working well.
The OFT found that, pre-tax, the UK has some of the cheapest road fuel prices in Europe. In the 10 years between 2003 and 2012 pump prices increased from 76 pence per litre (ppl) to 136ppl for petrol, and from 78ppl to 142ppl for diesel, caused largely by an increase of nearly 24ppl in tax and duty and 33ppl in the cost of crude oil.
A key feature of the road fuels sector over the past decade has been the growing influence of the big four supermarkets. They increased their share of road fuel sold in the UK from 29 per cent in 2004 to 39 per cent in 2012. The supermarkets' high throughput per forecourt and greater buying power has allowed them to sell fuel more cheaply than other competitors. In August 2012, for example, the average price of petrol at supermarkets was 2ppl cheaper than the average at oil company owned sites and 4.3ppl cheaper than the average charged by independent dealers.
The OFT recognises that many independent dealers have found it difficult to compete in this sector, with a significant number exiting the market. Overall, the number of UK forecourts has fallen from 10,867 in 2004 to 8,677 in 2012, although the rate of decline appears to have slowed in the last three years. In the majority of areas where forecourts closed between November 2011 and August 2012 retail competition still appears to be strong.
The OFT examined a number of specific concerns that had been raised about the road fuel sector, including:
- Differences in pump prices between neighbouring towns - The OFT found that petrol and diesel tend to be cheaper in local areas that have a greater number of local retailers, in particular areas where there are supermarket forecourts.
- Differences between urban and rural areas - The OFT's analysis found that in August 2012, for example, petrol was around 1.9ppl more expensive and diesel around 1.7ppl more expensive in rural areas than in urban areas. There appear to be a number of factors which account for these differences including lower throughputs per forecourt, fewer competitors (including supermarkets) within a local area, and higher transport costs for getting fuel to rural forecourts.
- Independent dealers' ability to compete fairly in the market - The OFT examined claims that supermarkets' and major oil companies' practices may be making it more difficult for independent dealers to compete with them. However, the OFT has not, to date, received evidence of any anti-competitive practices being used against independent dealers that might lead it to take enforcement action. The OFT will continue to consider any credible evidence it receives and consider taking action where practices appear to breach competition law.
- Rocket and feather' pricing - The OFT investigated the widely held perception that pump prices rise quickly when the wholesale price goes up but fall more slowly when it drops. It analysed the relationship between retail and wholesale prices at both a national and local market level, as well as the relationship between crude oil prices and wholesale prices at a national level, but found very limited evidence to support such claims.
The OFT has also found that fuel is often significantly more expensive at motorway service stations. In August 2012, for example, prices were on average 7.5ppl higher for petrol and 8.3ppl higher for diesel than at other UK forecourts. While these differences may be explained to some extent by the higher costs associated with running motorway forecourts, the OFT is concerned that drivers are not able to view prices until they have pulled into the service station. It has therefore asked the Department for Transport to consider introducing new road signs that would display service station petrol and diesel prices for motorway drivers.
"We recognise that there has been widespread mistrust in how this market is operating. However, our analysis suggests that competition is working well, and rises in pump prices over the past decade or so have largely been down to increases in tax and the cost of crude oil," Clive Maxwell, OFT Chief Executive, said.
"Our call for information has not identified any evidence of anti-competitive behaviour in the fuel market at a national level, where competition appears to be strong. There may be some issues at a local level. Where we receive evidence of potential anti-competitive behaviour we will consider taking action. For example, we have recently opened an investigation into the supply of road fuel in the Western Isles of Scotland."
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