Thursday 6 November 2014

Danny Alexanders desperate fuel gambit

So typical of a failing minister - th fuel gambit. Whenever a nice, populist and patently untrue statement is demanded, fuel prices are right up there.

It is the mark of the unthinking, publicity seeking MP to roll out this old chesnut as soon as they notice the price of oil going down. Extensive research today has revealed, exclusively to C@W, that no minister in history has ever come out to note that petrol prices are low and should go up to keep up with the market.

61% of the price is petrol is Duty - Petrol taxes and VAT. So given crude oil has fallen $30 over the last few months, which is about 30%, you would only rationally expect to see a fee through of 18% in terms of a real price impact.

DECC handily keeps the stats, so we can see what has actually happened. Brent oil has hovered for most of the year around $103 to $108, with one spike up to $115 when ISIS really kicked off. The is has dropped down to $82 today.

UK retail fuel prices matched this, at around staying between 128p and 130p for most of the year. The big dive in Brent pricing occurred in September and since then the petrol price has dropped 6p per litre, down to 122p average today. Of course, this equates, accounting for duty staying the same, to around a 10% drop.

Perhaps Danny Alexander is right and there is a 8% price gap here - petrol should around 2-3p cheaper. Of course, plain market mechanics explain this, crude oil is not petrol, it needs to be bought, shipped, cracked and distributed. This all takes around 2 months. We should be seeing further price drops in the next 2-3 weeks as the supply chain catches up. Perhaps another 2p before Christmas depending on whether the market stabilises.

Of course, Danny Alexander is a Lib Dem, famous for their election leaflets where they stand next to fixed potholes in the roads with their thumbs up, as if somehow this was their efforts on behalf of the electorate. The same is true of this, Mr Alexander knows full well prices will fall and no doubt before Christmas will make an announcement about how wise the petrol retailers were to obey his orders on this.

Shame he can't lose his safe seat at the election, eh?



Dan said...

Forgive me if I'm wrong, but won't the major fuel suppliers be buying oil futures at the one, two, three, six and twelve month intervals, so as to stabilise the price they are paying for oil into their systems?

If so, you're only going to see petrol pricing changes of any note over a period of at least six months, and then only because political meddling has forced them to do so. It is a pity that nobody can stand up on TV and explain these mechanisms to the general public.

CityUnslicker said...

Dan - they won't be at the moment when prices drop - the hedge more into the rising markets. when VIX is high they stop and re-assess. Plus you'd be amazed how cashe strapped they are to try and hedge such massive amounts. It's not majors that do refining anymore its people like petroineos.

BarryS said...

Is it the case that Sterling has depreciated by about 8% against the USDollar this year meaning the difference is all but accounted for when you allow that also.

CityUnslicker said...

Barry - perfect addition, had forgotten that too!

Nick Drew said...

won't the major fuel suppliers be buying oil futures at the one, two, three, six and twelve month intervals, so as to stabilise the price they are paying

Dan - as a spectator you can rarely guess what a company's hedging policy is

what's more, even when they state a hedging policy in their AR, you can't take it at face value

(I have done a lot of forensic work on co's policies / hedging strategies and i asssure you they frequently lie through their teeth - if they took the same approach in share offer documents they'd all be banged up, i have never understood why lying in the AR is somehow OK)

as CU says, sometimes they do't have the credit standing to execute big hedging strategies using forwards: if they want to hedge they are reduced to buying options which is generally a very expensive way of doing it

Unknown said...

This was on the BBC site this morning - One interesting thing is that when helpfully providing the June cost of oil in £, they use the current exchange rate rather than June's. But then they don't tell you what the current price is in £. Great work there.

My own back of the envelope calculations, that may well be overly naive: roughly, you get ~185L of products out of a barrel of oil, so divide the barrel cost by that to get an estimate of how much the oil contributes to the cost of a litre of product.

Before: $115 / 1.70 (June exchange rate) = £67/barrel; £67 / 185L = £0.36/L
After: $84 / 1.60 (current exchange rate) = £52.50/barrel; £52.50 / 185L = £0.28/L

(The remaining costs I assume are fixed, though maybe there's a bit extra to be saved as changing fuel costs will affect everything to an extent.)

So you'd expect a drop of £0.36 - £0.28 = £0.08. And you got a drop of £1.317 - £1.242 = £0.075.

Frankly if it'll keep Danny Alexander quiet then I for one will am happy for the petrol companies to get their extra half p.

Steven_L said...

No such thing as a 'safe' lib dem seat in Scotland.

For a start, he was elected on a 65% turnout. Highland council area turned out 87% in the referendum with 47% voting 'yes'.

The 2010 results in his constituency were:

Lib Dem: 19,172
Labour: 10,407
SNP: 8,803
Cons: 6,273
Votes cast: 47,086 (64.9%)

It's entirely feasible Alexander will lose over 30% of his votes next time around to labour and the SNP anyway. It's also likely another 7,000 or more yes voters will turn out to topple him.

I'm not sure what the odds are, but a bet on a massive swing to the SNP and him losing his seat might be worth a flutter you know.

Anonymous said...

I've put a quick graph together showing average weekly petrol price vs Oil price in £ since 2003

the petrol price is adjusted to remove VAT and duty from

To get oil into £ I had to use monthly exchange rates as haven't been able to find an easily extractable weekly list anywhere

the chart is here:

and for those interested the spreadsheet used to work this out:

Nick Drew said...

anon - for historical FX in as much detail as you could ever ask for, go here

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