Factors Driving Sustained Low Prices Of Petroleum Products In The United Kingdom

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 (Energy Institute, 2016).

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.

Analysis of Oil and Gas Retail Market

The following report aims to provide the analysis on governmental action that influence the profitability of oil and gas retail industries in the region of United Kingdom. The present study highlights the scenario of oil and gas industry with the help of elements of current data as well as the structure of oil and gas sector for the petroleum products. The present assignment incorporates certain factors that influence the current structure of the oil and gas sector together with the factors that drive low price sustainability of the products like petroleum for the period of five years. On the basis of identified and analyzed factor that influence the low price structure of the products in oil and gas sector, the possible direction on the price movement has been evaluated for the products petrol and diesel. The evaluation has been conducted based on United Kingdom retail sector market for oil and gas industry for the short- term future.

In the recent year 2014-15, United Kingdom has been the largest producer of oil and gas products producing around 1.42 million barrel of oil liquids. However, the rate of consumption of oil and products in the year 2013 was notable around 1.508 million barrel of oil therefore; the region has been a significant country to import the oil products along with the hydrocarbon products (Berk and Rauch 2016). Considering the current economy, United Kingdom has been observed as the highest cost producer of oil and gas products that valued approximately at $20.40 for operating cost while the quantity of production amounted to 39 billion oil barrels. On the contrary, increase in production influenced the consumption rate in the region as the overall domestic intake declined by around 97% of the total consumption while the overall consumption declined by around 5% (Anifowose et al. 2016). Viewing the production rate, capacity and consumption rate of oil and gas products, it has been anticipated that the primary consumption of energy would be created at 70% from the production of oil and gas by the coming years 2020. It has been noticed that United Kingdom contributes highest amount for tax revenues amounted to $300 billion because of high price of oil and gas products. In terms of payment for corporate tax, United Kingdom made around 28% of the total amount of tax in the present years (Devlin et al. 2016).

During the recent years, it has been established that several companies engaged in the business of oil and gas retailing market reported around 13% decline in the production of oil and gas products. Besides, North Sea region has been considered as highest producer of the products of oil and gas industry in the financial year 1999 whereas United Kingdom becomes the major producer of oil and gas products in the recent years. Further, increase of retailing organizations in the recent years assists in creating and supporting job opportunities that reached to around 45,000 jobs (Akgul et al. 2014). Due to the continuous rise in present economy activities, United Kingdom supported in creating job opportunities over 89,000 since the oil and gas sector associates with the companies’ ownership together with the dealers and hypermarkets. Dealers in the oil and gas industry means the ownership in which specific individuals or group of individuals acquires the industry by using organizational brand for operating business (Demirbas, Al-Sasi and Nizami 2017). On the contrary, owner in hypermarket means trading as well as retailing oil and gas products in the name of their own brand. Further, companies refer to the business owner who produces and operates business of gas and fuel products by considering subsidiary group or under lease options (Radnejad and Vredenburg 2015).

Structure of Oil and Gas Retailing Sector

However, it has been noted that due to several changes in macro- economic conditions, the petroleum price revealed unexpected decline during the later period of 2014 resulting in lowering the cost of living within the region. Changes in the pricing structure of petroleum products influenced due to changes in the supply of petroleum products and technologies long with the changes in economic activities. During the period of June 2014 to January 2015, the price of oil and petroleum declined by more than 50% that involves several phases (Gaudenzi et al. 2017). At the initial phase between June 2014 and November 2014, price of petroleum products declined from $110 per barrel of oil to $80 per barrel oil. After the initial phase, the price of oil barrel and petroleum products revealed decline more than 40% valued to less than $50 per oil barrel by the period January 2015 (Griffin and Teece 2016). However, in the phase of 2011 to 2013, price of oil and gas products declined by around 20% caused decline in value of transport industry by 70% whereas in domestic sector fall in price was around 4%. In addition, price of oil and petroleum products in 2010 was significantly lower since the average rate was less than 15% affecting the transport and domestic sector at moderate level (Gerber et al. 2016).

Persistent low price of petroleum products in the oil and gas industry emerged due to several factors over the years. One of the key factors involve has been demand and supply chain for the fuel and gas products that caused lower price structure over several years. High rate of petroleum product supply and lower rate of demand not only troubled the price structure in the region of United Kingdom but also in other countries (Kaltenegger et al. 2016). Between the period 2013 and 2015, supply of fuel and gas product has been higher than the economists’ expectation whereas the demand rate reflected continuous decline in the region of Europe and Asia (Holwerda and Scholtens 2016). Other than high rate of supply in these regions, Iraq and Saudi Arabian region also reflected positive results and high supply rate. It was noted that the federal government did not consider to reduce the petroleum production since energy production, transport industry and other sector were dependent on the petroleum products. Consequently, price of fuel and gas represented substantial fall approximately by 20% and more (Dagher 2014).

Econometric technique is another factor that influences the price of petroleum products in the recent financial years. The econometric technique refers to the models and systems which measures the economic activities around the globe and measures the availability of resources (Wawuda and Mungai 2016). It has been observed that in the recent years, regression within the terms of econometric techniques reflected several errors which provided pressure in the production process of the oil and gas industry. As a result, the petroleum products and other products in the sector of fuel and gas established lower price structure. In addition, certain limitations within the approach of techniques to produce the petroleum affected the strategic behavior with respect to supply as well as consumption level hence; the overall oil price dropped at higher rate (McCollum et al. 2016).

Critical Analysis of the Factors that Drive Sustained Low Price of Petroleum Products over the Five Years

Response from the financial investors has been considered as significant factor that caused significant fall in the price structure of petroleum products. Investor’s response towards trading on non- commercial securities, futures and options resulted in decline in the petroleum price since investors’ demand in commodities market was not high (McCollum et al. 2016). In response to the fluctuations and decreasing trend in the petroleum prices, it was speculated that the rate of commercial trading and consumption would be affected together with the changes in the price of equity stocks. In the period of 2012- 2014, sharp increment in the commercial investors’ trading has been indicated other than the investors involved trading within oil and gas industry. Investment position for trading in non- commercial stocks in the future market influenced the pricing factors that are directly associated with the prices of stocks in commodity market (Wawuda and Mungai 2016).

It has been noted that the product of petrol and diesel provides considerable impact on the standard of living of individuals, which provides frequent variation on the demand and supply chain. It has been noted that the utilization of sustainable energy represented massive growth in the production of oil products, which lowered the demand for other resources of oil products like petrol and diesel. Accordingly, it can be said that price of petrol and diesel products is expected to decline in the short- term future due to differences in demand and supply chain management. In view of the above analysis, price of fuel and gas products largely depends on the supply chain which eventually depends on the product output, price of fuel and gas is expected to decline further due to growth in production rate (Demirbas, Al-Sasi and Nizami 2017). However, the fall in price would be for short- term period and not for long- term as per the current estimation within the financial economy. As United Kingdom is ranked for largest producer of petroleum products, it is expected that the price would fall by 7% to 10% if the rate of supply as well as level of consumption remains persistent as per the rate of current economy (Griffin and Teece 2016).

Moreover, the factor on BREXIT vote in terms of United Kingdom motorists stated the estimation on price of price of petrol with a rise approximately by 5% since the price of another product Brent represented increased price structure during the current years (Fritsch and Poudineh 2016). As per the market evaluation for current years, price of fuel and gas has been decreasing more than 50% whereas the price of petrol product revealed stable increase due to the steady consumption rate of around 109p per litre. On the contrary, charges on tariffs, government duties and other tax charges reflected increasing trend which was around 57.95p per litre. Such charge was considered as more than half of petrol price in existing scenario that eventually harmed country’s economy and lowered the overall price of oil and gas (Radnejad and Vredenburg 2015).

Besides, production of oil and gas production expected to be hampered due to exit of Britain and Netherlands from the vote of BREXIT. Exit action by these two regions would affect the market economy of United Kingdom and simultaneously UK is expected to experience certain issues in production of petroleum products (Radnejad and Vredenburg 2015). According to Caporin and Fontini (2016), it has been stated that the change in BREXIT vote would result in decline of United Kingdom’s market economy and consequently, price of petrol and diesel would move in declining trend in near future. Depreciation of United Kingdom’s currency indicates appreciation of foreign currency that results fall in the consumption rate for the products of petrol and diesel. Accordingly, if the consumption level declines, supply level goes up then the price is expected to decline as per the pricing economy. Other factors that impacts fall in price of petrol and diesel in short- term future are tax policies, rate of inflation and distribution costs (Caporin and Fontini 2016).

Recommendation and Conclusion

Due to high rate of production in oil and gas industry, it is significant for the government of United Kingdom to undertake actions to improve the pricing structure and marketability. As a result, organizations in this sector will be able to derive improved profits and sustainable growth in the coming years. Government may impose developed policy on trading environment, reduction of greenhouse gas to eliminate the release of harmful gas that would improve the consumer demands as well as pricing structure.

From the above discussion, it can be said that the oil and gas sector has been affected due to various reasons due which the price of petroleum products reflected sustained drop. Factors of demand and supply chain, unhygienic production of bio- fuels and elements of high cost resulted fall in the price of petroleum products in United Kingdom. In addition, changes in inflation rates, depreciation in foreign currency or Pound Sterling as well as BREXIT vote would affect the price of petrol and diesel in decreasing trend in short- term future.

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