Factors Driving Low Prices Of Petroleum Products In The UK

The asymmetric adjustment between wholesale and retail fuel prices in the United Kingdom has generated lingering concerns about the transparency of retail petroleum products prices. However, over the past few years, motorists in the United Kingdom have enjoyed a sustained period of falling pump prices .

Critically analyse the factors driving the sustained low price of petroleum products over the past five years and based on your findings, evaluate the possible direction of the price of diesel and petrol products in the United Kingdom in the short-term future.

An Overview of Oil and Gas Market, UK

The business outlook of 2017 in Oil and Gas sector of UK reflects on sector’s past performance as well as it assesses its future prospects. Several trends have been observed in the oil and gas sector of UK that influences the performances of the sector. Oil discharge to sea as well as the emission to the air by oil and gas firms has become the overall trend over the last few years. The trends sometimes continue the decline of UK oil and gas production together with highly enhanced technique management and sector’s use of best available techniques (Yusuf et al. 2013). The purpose of the report is to identify the factors that drive the sustainable price of petroleum products. The report also highlights the ability to analyze the factors that negatively influences the size and structure of oil and gas organizations in UK.

The current scenario of oil and gas sector, UK indicates that the average date Brent oil prices fell by an additional 17% last year to $43.7 per barrel, from an average of $52.5/bbl, which is driven by both demand and the supply side factors (BBC News 2017). The growth of oil demand was around 1.8 million barrel per day in 2015, but it is now 1.5 million barrel per day (Stamford and Azapagic 2014). Conversely, the contraction in non-OPEC supply influenced by the poor investment in upstream projects was not observed as sharp as expected producers yield more output from the existing assets (Mathias 2013). However, towards the end of 2016, the demand of supply chain has started to change. The recent data from the Office for National Statistic demonstrate the average rate of return for oil and gas organizations in United Kingdom enhanced slightly in the third quarter of 2016 to 1.6%. As mentioned by Arouri, Jouini and Nguyen (2012), this has probably been the first positive sign of recovery after six years of declining rate of return. It could be attributed primarily to the developments in operational efficiency as well as cost.

It is identified that oil and gas sector of UK comprising both production and the essential support services has been the significant part of the economy. The industry offers opportunities for employment for over 4 Lac people throughout UK and Northern Ireland (45% Scotland, 55% England). The oil and gas sector is Britain’s biggest industrial investors.  The sector has made the investment of    £11.5 billion in 2012. In addition, “DECC” anticipated the investment of £ 14 billion in 2013) (BBC News 2017). The industry gained the ability of meeting one-half of UK’s total primary energy needs and demands.  The sector boosts the balance of payments by almost £50 billion per year report published by oil and gas sector 2016 (Mohamed 2012). The strong domestic supply chain has observed the revenue growth per year since the last five years. So, the area that influences the growth, market size, and structure of oil and gas, UK have been found and given in the following.

• Opportunities of employment across UK
• Largest industrial investors boosting the economy
• Production in the sector meeting a maximum of UK’s overall primary needs
• Strong domestic supply chain

Demonstrating the Ability to Analyze the Factors Influencing the Current Size and Structure of Oil and Gas Retail Sectors and the Consequences of Price Increase

Continuous oil and gas drilling activities influencing the growth, which means due to increasing needs and demands for oil and gas products in each nations as well as icreasing existing hydrocarbon resources, a considerable attention paid to the unexpected reservoirs to maintain the balance with the increasing demand. Shuen, Feiler and Teece (2014) mentioned that by digging these undiscovered resource, the levels of production could be increased, which could decrease shortcoming between the demand the supply. As put forward by Fingas (2016), there are tremendous technological advancement that lead to the maximum use of oilfield to the market.

The development in the technology provides the ways of implementing various types of drilling for the extraction of oil and gas including the horizontal and directional drilling. This could increase the use of several types of drilling equipments. In addition to this, all oil organizations are increasing their investment in Research & Development to enhance the efficiency of this equipment to improve the volume of oil and gas production and decrease the environmental impact. Therefore, it can be mentioned that rapid technological development influence the market size and structure as this aspect influence the economy as well.

The price of oil is increased by 60% than its usual oil price over the last few years. Notwithstanding, Fayyad and Daly (2011) mentioned that two of the last three recession were appeared significantly by sharp increase in oil price. Thus, some significant concerns lighten the fact that recent “oil shock” would end the favorable base of healthy progress with slow inflation that United Kingdom has experienced in last seven years.

 As mentioned by Ono (2011), the increase in price directly enhances the costs of using oil production inputs. It also reduces the profitability. As the consequence, oil organizations like British Petroleum would cut back on the employment as well as investment, which lead to the fall in DGP growth. Rise in oil price also increases the cost of petrol and “heating oil”, decreasing the real earning of households. As the consequence, the spending of the consumers is squeezed, which again hits GDP growth. As the price of oil reduces the real earning of oil customers across the universe; thus, the firms have to observe the decline in the domestic market. The firms also suffer from the overseas market as well. Eventually, the profits from the export go down. The organizations might charge extra for the oil products. Thus, the employees could recover the challenge of poor real income receiving higher wages.

Arguably, Wang, Wu and Yang (2013) mentioned that demand for oil is inelastic; thus, the increase in price is a positive change and good news for the marketers as they could experience the growth in their revenue. In addition, the oil importers could observe maximized costs of buying oil. Moreover, as the oil sector has the highest contribution, the influences are completely significant. An increasing oil price could even shift the economic as well as the political power from the importers to oil exporter.

Impact of Oil Price Rise in UK

“Monetary policy”- Due to the “cost-push inflation”, oil price presents a dilemma to policy makers. As mentioned by Narayan and Sharma (2011), the higher inflation conventionally requires the higher interests rate to keep the inflation on target. However, the reduction of inflation might not be suitable as the productivity might be well under full employment. Alternatively, in the beginning of 2012, the policy developers paid significant attention to the “cost-push inflation” and less concentration to poor economic growth.

A significant increase in the oil price contributes to the highest inflation level. This happens as the transport cost increases and leads to the high price for man goods. This could be “cost-push inflation”, which is entirely different to inflation caused by increasing aggregate demand as well as excessive growth. As put forward by Reboredo and Rivera-Castro (2013), higher oil price leads to the enhancement in the present account positions of oil exporters like OPEC nations. On the other side, the oil exporters could observe an increase in foreign currency, which could use to purchase foreign assets.

Marketers consider that Brexit might not create materialistic consequence on the legal parameter of UK’s oil and gas sector (Pollitt 2012). This takes place because the government of UK always attempts to gain the control over its energy policies with the initiative of development in oil and gas reserves. The government has paid a special attention to the regulatory policies such as taxation of oil and gas exploration, evaluation growth as well as activities related to productivity. These areas have remained as the significant concern determined by UK government. The unexpected occurrence of Brexit created a dramatic merger of “Department of Energy” and “Climate Change” with the authority of business (Fidler and Noble 2012). As the government of UK starts to set out from EU, the nation negotiates the trade deals. As the consequence, the several businesses in UK favor an enhanced strategy with the inclusion of “cost competitive” energy supply.

The governmental changes should be an antecedent to highly sustained government engagement, which could develop a new approach for oil and gas organizations in UK. This could affect the economy and the growth of the business

As put forward by Yusuf et al. (2013), when the government is backing the firms, they find it easy to maximize though production of oil and gas. It is also observed that the sector may be a basis to sustain the future financial development. The price of gas and oil and reducing “UKCS” reserves have given a push to the tough challenge for North Sea oil and gas sector.  This could be against the backdrop that new government should continue to attract as well as retain the investors in the industry.

As opined by Skea,  Chaudry and Wang (2012), with the security of energy supply being the significant concern, especially as the conventional ties with the EU are broken with the loss of production of North Sea, the UK regulatory bodies promote the progress of domestic share oil and gas resources. The occurrence of Brexit enabled UK government to take responsibility for petroleum licensing as well as the regulation on the environmental changes.  In addition to this, the taxation regime that applied to the profits gained from oil and gas production in UK and its territorial waters is falls under the responsibility of UK government. For EU directives relating to oil and gas activities, UK government has to determine whether to enhance its own domestic policies. As stated by Yusuf et al. (2013), if UK develops its own regulatory framework, there is a potential that oil and gas organizations find themselves to the varieties of regulatory framework.

Microeconomic Impact

 Hence, Rosenow (2012) also mentioned that there will be a strong impact to the UK upstream oil and gas due to the fact that First Minister of Scotland has assured that a vote to leave EU could certainly lead to another Scottish independence referendum. Thus, the re-emergence of question of Scottish independence may create uncertainty for the sector, which could potentially result in delays caused by organizations. On the contrary, Fidler and Noble (2012) mentioned that with the current succumbed oil price affecting the confidence in UK oil sector, any re-emergence of the subject of Scottish independence could add to the stress that sector has been facing. UK upstream oil and gas sector is already struggling being the mature basin with the maximum operating costs than other jurisdiction clubbed with the current succumbed oil price.

Conclusion

Based on the above mentioned discussion, it can be added that UK government should grab the opening developed by its “Shale gas resource”. It might bring provincial financial development as well as the employment. It is also anticipated that Brexit could lead to the new Government with the prospect of more attractive investment climate for oil and gas investors. It is also expected in the future the oil and gas sector will observe an emergence of a sensible as well as balanced long-term energy, which could involve a striking and steady environment for oil and gas investors. The new emergence could offer a secure as well as “cost competitive source” of oil and gas marketing in UK.  

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Yusuf, Y.Y., Gunasekaran, A., Musa, A., El-Berishy, N.M., Abubakar, T. and Ambursa, H.M., 2013. The UK oil and gas supply chains: An empirical analysis of adoption of sustainable measures and performance outcomes. International Journal of Production Economics, 146(2), pp.501-514.