Factors Affecting Oil Supply In The UK: A Critical Examination

There has been a gradual contraction in oil supply and distribution infrastructure and its capacity within the UK over the last 20 years. At the same time, the UK’s net trade position has continued to evolve, with growing imbalances in gasoline and middle distillates (diesel and jet fuel) being a key feature of recent trends.

Critically discuss the factors driving these trends and suggest measures needed to reduce the risk of short term disruption to supplies. 

Factors Affecting Present Size and Structure of Current Oil and Gas Retail Sectors

The petroleum industry plays important role in economy of UK. The country has more than 200 companies in the petroleum industry that are into manufacturing, supply, refining and marketing of products. The expansion in the aviation sector, growing number of diesel vehicles and reduced use of oil for power generation has changed demand for oil products in the last 10 to 15 years (Krishnan & McCalley, 2016). This report provides the size and organization of oil and gas retail sectors and the influence of increasing price of oil. The actions of government for the profitability of oil and gas retailing are also analysed.

The factors affecting retail sectors of UK are assembled under four main areas. The evidence collected from consumers, suppliers, competitors and government affects oil and gas retail sector.

Needs of consumers

A consumer considers price and convenience as important factors while selecting PFS. Convenience means the adjoining location to customers. It is experienced that a few portion of customers like to drive to acquire fuel at economy rate. The focus of clients moves towards price with the availability of more PFS (Lale, Udo & Ana, 2014). A location is found crucial when there is less choice of PFS throughout time of travelling. According to an investigation conducted in UK in 2012, 1000 customers above the age of 16 years have more emphasis on price then they had in the past years. A frequent query is also raised on the convenience of filling fuel. The people agreed that they look out for the convenient and nearest site for shopping than the shopping for less fuel prices was low in 2012. It reveals that the customers mostly consider price of fuel and take initiative to look for cheap oils in the convenient locations (Kaznacheev, Samoilova & Kjurchiski, 2016). The result varied when the survey was done in Wales, East Angila and Britain. An investigation was conducted in Ireland by Consumer Council and the outcome exposed that 82% of defendants changed driving attitude due to increase in fuel price. They also agreed that they always search for the best fuel price. The customers deliberate other privileges provided by the PFS. These privileges can be found in the form of shopping, loyalty and car wash facility.

Bond with fuel suppliers

The independent fuel suppliers and oil company supply divisions supply fuel to the PFS retailers. The relationship with suppliers shows in terms of prices paid by the PFS dealers for the petroleum merchandises. The price can be paid in the form of Platts Plus which means global index of prices is published for petroleum products. It is mentioned in terms of US $. The prices which are charged extra by sellers of fuel over the mentioned charges are known as plus element. 

Impact of Rising Price of Oil

Competition levels

The consumers hold the same brand loyalty and are more sensitive to prices. The competition level is affected by the these considerations:

• The time and space required to reach at substitute PFS.
• The size and figure of PFS in the specific ecological area.
• The several companies which run the PFS in specific ecological part.

The reason behind increase in competitive prices is due to growth of hypermarket in the oil and gas retail industries of UK. It has caused major competition among the owners of PFS which are already operating hypermarkets (Mitchell & Mitchell, 2014). The owners of PFS need to face hypermarket basis retail prices and it has led to gross margins to reduce. The reduced gross margin is the percentage of the retail price over the twenty years for the independent dealers (Perrons & Jensen, 2015).

Regulations and government policies

The business of PFS is influenced by regulations and guidelines of government which helps in investment and communication needs. The drivers of government are classified into economic drivers, safety standards, environmental policies and rules. The economic drivers can be duties like fuel duty, business and corporation taxes which affects PFS business. The business rates are analysed on five year base by Valuation Office Agency. The assessment is done on the basis of performance of PFS by the VOA (Mellat Parast, Adams & Jones, 2011). 

The financial performance is reliant on the fuel prices. There is move in terms of trade by moving income from the oil importing countries to the oil exporting countries. The rise in prices of oil is also influenced by the rise in price of gas. The macroeconomic effect is affected by the increased prices of oil. The advanced earnings from exports is causing rise in real income to the oil exporting nations (Bildirici & Bakirtas, 2014). The increased oil prices are causing negative impact on the importing countries of oil. More energy supplies are needed to keep local economy running. The increased oil prices led to increase in production. It has also caused to increase in product prices. Inflation has made the life of consumer’s life tougher around the world (Hafezi, Akhavan & Pakseresht, 2017). The economies are affected by flat wages and the augmented disbursement rate. The domestic indicators of UK have revealed factory gate prices of UK. It has augmented to the maximum levels from November 2009 due to increase in prices of oil. Through this time the inflation rose from November to January and VAT was at 17.5 % throughout February. The Bank of England forecasted that pressure of inflation occurred more sharply. The Vat was reduced to 15 percentages by the government to stimulate the growth of economy. The increase in prices of oil has increased disruption and decreased export of oil by UK petroleum and gas retail sector (Castor, et. al. 2016). The increased price of petrol has caused shutdown of UK North Sea pipeline. It had immediate effect on operators which relied on it’s capacity (Financial times, 2018). The energy technology is disrupting petroleum retail sector. The companies are deciding to do something drastic to the declining business (Offshore wind, 2018). The closing of petrol stations and reduction in the storage capacity has made UK more susceptible to oil supply disrupptions (The Telegraph, 2013).

Influence of Government Action

The policies and regulations of government have influence on PFS companies. These are key drivers for the performance and investment needs. The drivers related to government have been divided into following groups:

The financial drivers are linked to tax which affects PFS companies like fuel duty, VAT, business rates and corporation tax.

Business rates

The business rates are created on the basis of rateable values that are evaluated in five years by VOA (Valuation Offices Agency). The valuation of VOA for PFS depends on the transaction performance of PFS. In the separate shop the RV is created upon the size of building. So, the PFS can acquire a lower business rate if it is operated as a shop only (Barata, et. al. 2014). The PRA successfully campaigned for reduction in RV between 10-25% while some rural sites have seen no discounts. The rural sites still face a rates bill which is equal to 10% of gross profit of rural PFS (Urciuoli, Mohanty, Hintsa & Gerine Boekesteijn, 2014). 

Fuel duty and VAT

Fuel duty and value added tax together makes 60 percentage of ultimate selling price.  Fuel Duty was 57.95ppl in 2012 for petrol and diesel and VAT was being applied at 20%. The rise in final prices has been the product price in the last five years. While between 1990 and 2000 the main cause of increase in petrol prices was fuel duty which increased from 19.49 ppl to 48.82 ppl in 2000. The influence of fuel duty and VAT differs on the owners of PFS. It is just because of payment models which autonomous dealers and supermarkets are subjected to. The supermarkets pay for the fuel minimum fifteen days after distribution. The supermarkets collect fuel duty and VAT from the customers prior to making compensation to the fuel suppliers. The autonomous sellers have to pay for fuel within the 3 days after delivery. There is substantial requirement of working capital as the delivered fuel cannot be fully sold in three days. The working capital has also improved as fuel duty. In 2000 a 38,000 litre tanker used to cost below £25000 with fuel duty and VAT accounted for just £21,000. The same volume cost to £50,000 in 2012 with £30,000 for taxes. The small independent dealers manage stock levels to minimise average stock holding (Wälde, 2008).

Corporation tax

The rate of corporation tax has abridged from 28% to 23% from 2010 to 2013. The small PFS businesses generates less than £300,000 revenue in a year are required to pay low and small profits rate that is reduced from 21% to 20% in 2011 (San Ong,  Teh,  Ahmad & Muhamad, 2017).

The government has made various environmental and safety policy for the petroleum products. Biofuels and introduction of E10 are two policies were raised in respect to PFS.

Biofuels

The government has introduced E10 petrol in a few European states. The E10 petrol comprises 10% ethanol and 90% petrol which aim to grow segment of renewable sources in total energy expended in the transport sector. It has increased the segment of renewable energy in the total energy expended. It is driven by  renewable energy directives. E5 fuel is referred to the maximum combination of ethanol with 5% petrol. The E10 fuel standard are in the practice of launch in UK, pursuant to suppliers to determine whether to introduce E10 in UK (San Ong, Teh, Ahmad & Muhamad, 2017). Along with the introduction various issues have been raised by the market participants. The fuel pumps that supply E5 petrol will be able to take E10 with no additional investment. There is only concern about the availability of substitute grades of unleaded petrol at PFS.

There is found two grades of fuel such as unleaded and diesel in certain rural locations. The rural locations can choose to stock up E10 fuel if they are unable to supply E5 petrol.  The motorists may not prefer filling up as they are not known to usage of E10. They can also stock superior grade of unleaded. The respond of consumers to the introduction of E10 may be assumed uncertain. E10 also tend to additional spending for the maintenance to ensure fuel tanks and pumps remain to perform at the desired level. It can also cause to closure of small PFS which are unable to introduce multiple grades of fuel (Krishnan & McCalley, 2016).

Petrol stage II vapour recovery

The vapour recovery schemes are needed at PFS to minimise emissions of VOCs. It is required from packing to supply of petrol. It is controlled by petrol vapour recovery stage I and stage II.

• The stage I directive targets at dropping VOC releases from loading of petrol pumps and stations to loading and unloading at petrol pumps and stations.
• The stage II contracts with the VOC emissions from filling petrol in vehicles at PFS. It has come into the light from  2012.

There are various regulatory policies which affects the profitability of PFS businesses.

Planning

The planning system of government has offered some protection to retailers. The consent is granted for new development for only retail development only when the planners consider need of more retail development. National Planning Policy Framework (NPPF) has been published in 2012 to clarify the guidance and it includes impact and sequential test. The government has focused more on building new PFS as it could lead to three to five autonomous traders in the local area. 

Measuring instruments directive (MID)

The MID has been added in UK law in 2006. It necessitates producers to verify designs of courtyard tools under a set of European rules. The equipment which are sold after October 2016 must have obtained MID certificate (Xie, Yue, Wang & Lai, 2010).

National emergency plan for fuel

The government has settled this plan to deal treat supply disruptions in transporting fuels. The measure under this plan includes limiting amount of fuel which can be purchased per visit to PFS. It also includes Designated Filling Stations (DFS) for the privileged customers. However there is less transparency that how DFS can be selected and what kind of security arrangements are needed to support DFS.

Conclusion 

In the above report, the UK petroleum retail sector has been discussed. The key drivers are separated in four different groups, customers, dealers, rivalry and government strategies. All these aspects affect petroleum retail sector contrarily. It is determined that the supermarkets influence market negatively that’s why PFS formulate strategies to overcome competition. The government has taken actions for the profitability of oil and gas retailing by implementing policies and tax structure of country 

References 

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