Thursday 27 August 2015

Next target for the newspaper's oil wrath : retailers

In the recent times the Major petrol retailers get a lot of stick, somewhat justified but not entirely, for not reducing their prices when the price of crude oil falls. As I have gone into before, the refining of the product and margins in that industry are of course more important factors. Not that journalists care.

I have been impressed of late with Journo's uncovering the scams at airports and hospitals where customers are over-charged because of the captive market created in the local environment. These are good things and show the power of a free press, albeit in a small way.

To continue this theme, we can consider what crude oil gets made into - the answer is easier if we try to think of things not derived from crude oil. For example, in a supermarket:

- All the medicines are oil based more or less,
- All packaging that is not pure paper - so, er, all of it.
- Most flavourings and dyes
- All baby products, with each nappy being one  cup of crude oil originally for example
- Then there is the heating and lighting
- Much apparel, including all trainers, are mainly oil based
- Plus the costs of transporting everything to the market.
- Even all the food is grown with oil based fertilisers.

So basically, supermarkets have had a 50% reduction in the input costs to their products in the past year months. It may take some time to feed through as many of the products are a long-time in production and transport. We should really expect to see big reductions in retail prices across the majority of goods. In fact, this alone could well be enough to push the country into deflation for the rest of this year.

However, I have a sneaking suspicion the desperate big Four supermarkets - all suffering from stiff competition, will use the falls to help them rebuild margins and profitability where possible.


Anonymous said...

Fertilizers are inorganic compounds, not derived from oil.
And around here the heating and lighting come from the local nuclear power station.

But your general point holds.

Don Cox

Steven_L said...

Yes, ferts are labelled for 'NPK' content - nitrogen, phosphorus, potassium - I've never understood why folk say they are based on hydrocarbons either.

Is CU reading too much 'comment is free'?

dearieme said...

Nitrate fertilisers are based on "petroleum" - though typically not on oil - since they are made starting with natural gas (methane) to provide the hydrogen used to manufacture the ammonia, the ammonia being both used directly in the manufacture of ammonium nitrate, and indirectly, being the basis for the manufacture of nitric acid.

They used to teach this sort of stuff in the better sorts of secondary schools.

andrew said...

Picking an old oily scab
the IC have tipped XEL.

Blue Eyes said...

Oh come on, aren't you all supposed to be gritty engineers and scientists? The chief component of fertiliser is energy; most of which comes from coal/oil/gas.

CU is right, retail input costs are generally falling. Energy, Asian imports, milk(!)...

Wages and land costs are important as well, and in the UK we can say they are rising (especially at Sainsburys!), so not everything is in a deflationary spiral.

We can also be fairly sure that the retail sector is fiercely competitive, so input cost reductions are likely to be passed on to us consumers.


Bill Quango MP said...

Just in time for cyber monday.
Which is November 28 this year.

Steven_L said...

they are made starting with natural gas (methane) to provide the hydrogen used to manufacture the ammonia

Thanks. But that's just some of the nitrate ferts, not the 'P' and 'K' ferts.

The chief component of fertiliser is energy; most of which comes from coal/oil/gas

Really? The fertiliser plants I've visited all tended to start with effluent (i.e. effluent from people).

CityUnslicker said...

In the case of nitrogenous fertilizers (ammonia, urea, ammonium nitrate) the direct feedstock for their production is natural gas whose price is generally correlated to crude oil. In short, the hydrogen atoms in the natural gas are combined with atmospheric nitrogen to make NH3, ammonia.

The other main fertilizer types are phosphorous and potassium, both of which are mined and processed, so fuel undoubtedly makes up a significant portion of their direct and indirect costs.

OK, my posts are a little lacking on the detail for your comments, but my main point holds.

Sebastian Weetabix said...

You are of course right that the input costs of raw materials are falling, but if you'd ever worked in a business making stuff you would know that for most manufactured goods the RM cost is fairly trivial. Plant & equipment, design, R&D, sales, overheads (which of course walks on 2 legs), depreciation.

To give a general non-specific example from my specialty chemical world (no names, right?) RMs are typically only 5-20% of the cost, depending on what we're making. It's the fucking processing to turn STUFF into THINGS that really costs the money. When the RM costs go up, I pass it on as quick as I can, but there is always a delay because of... well, because reasons. Scared sales people who think the competition have some magic exemption from commodity costs, angry buyers, contract terms, you name it. So when the RM costs drop I enjoy it, and everyone else can fuck off, and all my sensible competitors think exactly the same way. Cartels are not required.

CityUnslicker said...

SW - all valid and true for you.

BUT Supermarkets don't make anything, they are logitistics companies, it should be more transparent. Of course wages and rents are the main components, but I was not expecting doubel digit cuts in prices! something would be nice...

Arthur Dent said...

Also total manufacturing costs of phramaceuticals are a rather small proportion of the sale price. REducing oil price by 50% would have a negligable impact on price to consumer

Anna Schafer said...

As it seems that the world is headed for a recession many people are forced to seek work in new industries. One industry that is still going strong and hiring in large numbers is the...crude oil jobs